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FNB Corp
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Hello and welcome to the FNB Corporation Third Quarter 2020 Quarterly Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today's event is being recorded.
I'd now like to turn the conference over to your host today Matthew Lazzaro. Mr. Lazzaro, please go ahead.
Thank you. Good morning everyone and welcome to our earnings call. This conference call of FNB Corporation and the reports it filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measure should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release.
Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials and in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate Website. A replay of this call will be available until October 27 and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate Website.
I'll now turn the call over to Vince Delie, Chairman, President and CEO.
Good morning and welcome to our earnings call.
Joining me this morning are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. Today, I will provide third quarter highlights and an update to our strategic initiatives. Gary will discuss asset quality and Vince will cover the financials.
Third quarter operating EPS of $0.26 reflects strong fundamental performance. As we continue to have success across many business units, despite a challenging operating environment and provision expense totaling $27 million. This quarter's performance reflects growth in average loans and deposits of 2% and 4%, respectively, as well as continued strength in our fee-based businesses.
With strong contributions from capital markets activity and record mortgage banking income of $19 million. On a linked quarter basis, tangible book value per share increased $0.18 to $7.81. As we continue our commitment to paying an attractive dividend by declaring our quarterly common dividend of $0.12 last week.
In addition, our CET1 and TCE ratios increased meaningful, and after adjusting for the indirect loan sale, CET1 improves almost 20 basis points to the strongest level in the Company's history. Our bolstered capital base should provide us with increased flexibility to deploy capital on the best interest of the shareholders.
Return on tangible common equity was again peer leading at 14% and the efficiency ratio equaled 55%. These results illustrate the resiliency of FNB's business model and are truly remarkable, given the challenges presented and unique circumstances the industry is facing amidst the global pandemic.
I’m extremely proud of our team for going above and beyond to support our customers in this challenging macroeconomic environment. Their hard work was critical to providing timely assistance to our impacted customers through the paycheck protection program by offering loan deferral options and consumer relief, as well as other programs to help clients manage their finances during these difficult times.
Customer feedback has been overwhelmingly positive, and we are encouraged by the low single-digit level of second loan deferral request as a percentage of total loans as of October 15, 2020. Lower demand for second deferral requests is indicative of the quality of our customer base, our consistent approach to credit risk management and FNB's dedication to disciplined underwriting standards throughout various business cycles.
Our bankers and credit teams will continue to actively evaluate and work with COVID-19 impacted borrowers as they manage through their pandemic related disruption. Earlier in the third quarter, our organization was recognized as a 2020 standout commercial bank by Greenwich Associates. With FNB being 1 of only 10 banks in the country to be recognized for its response to the COVID-19 pandemic.
If you look at the credit metrics on FNB's COVID-19 sensitive sectors, we are favorably positioned to peers on a relative basis. Our disciplined approach to underwriting and portfolio management ensures granularity, diversification and appropriate credit structure within our loan portfolio. On the deposit side, organic growth in government programs have resulted in increased liquidity in our customer base.
Looking at the recent FDIC data compared to 2019, FNB has successfully gained share in 4 to 5 top market share position in Pittsburgh, Baltimore, Cleveland, Charlotte, Raleigh and the Piedmont Triad with our largest market Pittsburgh surpassing the $8 billion mark in total deposit.
Additionally, as of June 30, 2020 FNB ranked in the top 10 in retail deposit market share across 7 major MSA. And when looking at our footprint in total, FNB has a top 10 market share and more than 80% of the 53 markets categorized by the FDIC. Compared to June, 2019, FNB continued to gain market share as total deposits increased nearly $5 billion or over 20% overall.
If you look back over the last 6 months, we've added thousands of new households and more than $4 billion in total deposits. Diving deeper by examining the regional market share trends, FNB has 5 MSAs with greater than a $1 billion in deposits and 16 MSAs with greater than $500 million in deposits. These market positions reflect successful execution of our deposit gathering strategy centered on attracting low cost deposits through household acquisition and deepening commercial relationships, thereby enabling FNB to eliminate our overnight borrowing position.
The surge in core deposits has strengthened our overall funding myth as the loan-to-deposit ratio further improved to 89.1%. We continue to be absolutely focused on generating noninterest bearing and transaction deposit growth, given the impacts of the expected lower for longer interest rate environment. To complement our deposit gathering strategy, we are focused on supporting our customers and expanding our relationships as their primary capital provider with value added products and services while staying true to our credit culture.
Looking ahead to the fourth quarter, we are encouraged by the current position of the balance sheet with ample liquidity to support growth opportunity and an expanded capital base. Additionally, with our PPP efforts, we've added more than 5,000 prospects for non-customer PPP lending to pursue as long-term relationships.
Given our success and the quality of our bankers, we have firmly established ourselves as a formidable competitor across our seven state footprint, providing competitive financial products and services supported by technology investment and the best personnel.
With that, I'll turn the call over to Gary for more detail on asset quality.
Thank you, Vince and good morning, everyone. During the third quarter, our credit portfolio continues to perform in a satisfactory manner as we continue to work through this challenging economic environment. Our key credit metrics have held up well with some slight increases noted during the quarter related to the COVID environment that is largely tied to borrowers in the hardest hit industries, which we have built loan loss reserves for accordingly.
I will now walk you through our results for the third quarter, followed by an update on our loan deferrals and some of the proactive steps we are taking to manage the book. Let's now discuss some key highlights. During the third quarter, delinquency came in at a good level of 1.07%, an increase of 15 bps over the prior quarter, that was predominantly COVID related tied to mortgage forbearances, while the commercial portfolio remained relatively level with the prior quarter.
When excluding PPP loan volume, delinquency would have ended the quarter at 1.18%. The level of NPLs and OREO totaled 76 basis points, a 4 basis point increase linked quarter, while the non-GAAP level excluding PPP loans stands at 85 bps. This slight migration is attributable to some COVID impacted credits that were placed on non-accrual during the quarter, which is in line with our proactive risk management measures that we have in place to help identify potential pockets of softness.
Of our total nonperforming loans at September 30, 50% continued to pay on a current basis. Net charge-offs came in at $19.3 million for the quarter or 29 basis points annualized with the increase largely due to write-downs taken against a few COVID impacted credits that were already showing weakness, entering the pandemic.
On a year-to-date basis, our GAAP net charge-offs stood at 18 basis points through the end of the third quarter. Provision expense totaled $27 million, which includes additional bill for COVID related credit migration, driven by the hotel and restaurant portfolios, bringing our total ending reserve to 1.45%.
When excluding PPP loan volume, the non-GAAP ACL stands at 1.61%, a 7 basis point linked quarter increase. Our NPL coverage remains favorable at 210% at quarter end, which reflects the reserve build for the COVID driven credit migration during the quarter. When including the acquired on amortized loan discounts, our reserve position excluding PPP loan volume is 1.87%.
We continue to conduct a series of scenario analysis and stress test models under our existing allowance and DFAST frameworks as we work through this COVID impacted environment. Under the final 2020 severely adverse DFAST scenario, the current reserve position inclusive of on amortized loan discounts would cover 77% of stressed losses, which does not include losses already incurred year-to-date.
As it relates to our borrowers requesting payment deferral, 3.4% of our total loan portfolio, excluding PPP balances were under a COVID related deferment plan at quarter end with remaining first request representing 1.4% of the portfolio and 2% being second deferrals. As of October 16th, total deferrals have further declined by approximately $100 million to stand at 2.9%.
We continue to carefully monitor the credit portfolio as the pandemic evolves and borrowers work to overcome the uncertainty and challenging conditions that many currently face. Our exposure to highly sensitive industries remains low at 3.5% of the total portfolio, which includes all borrowers operating in the travel and leisure, food services and energy space with deferrals granted to these borrowers totaling 29% driven primarily by the hotel portfolio as we continue to work through these hardest hit sectors.
During the quarter, we conducted another thorough deep dive credit review of our commercial borrowers operating in these economically sensitive industries, which was led by our seasoned and experienced credit officer team. Our portfolio review covered over 80% of our existing credit exposure in COVID sensitive portfolios, including travel and leisure, food services and retail related C&I and IRE.
As part of our review process, we assess the adequacy of cash flow, strength of the sponsors backing the deals, the collateral position, and direct feedback from borrowers about their expected short and long-term outlooks, this level of review has helped us to quickly identify potential credit deterioration and take appropriate action as we did during Q3 to better position us for the quarters ahead, should this challenging economic environment continue.
In closing, we are pleased with the position of our portfolio entering the final quarter of 2020 relative to where we are in this COVID impacted economic environment. Our credit metrics have held up well and continued to trend at satisfactory levels as we remain focused on proactively identifying risk in the portfolio and aggressively working through it.
The experience and depth of our credit and lending teams have been paramount to our success, and I would like to recognize these groups for their tireless efforts each and every day as we work through these challenging conditions.
I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.
Thanks, Gary. Good morning, everyone. Now we will discuss our financial results and review the recent actions taken that have enhanced our overall balance sheet positioning, reduced interest rate risk and boosted capital levels.
As noted on Slide 4, third quarter operating EPS totaled $0.26 consistent with the prior quarter. The level of PPNR remain solid and we continue to proactively manage our overall reserve position with provision expense totaling $27 million. We feel good about the strength of the balance sheet and our current level of reserves based on what we know today after a comprehensive review of our loan portfolio.
Additionally, the quarter's results reflect the continued execution of our strategies focused on prudent risk management supported by our recent actions. For example, during the third quarter, we took proactive measures to strengthen capital and reduce credit risk. We signed an agreement to sell $508 million of lower FICO indirect auto loans that close in Q4 with the proceeds being used to pay down a similar amount of high cost federal home loan bank borrowings, of which $415 million with a rate of 2.59% was prepaid this quarter for breakage fee of $13.5 million.
We also sold Visa Class B shares at a $13.8 million gain to fully mitigate the capital impact of the FHLB breakage costs. Results in transactions should add roughly 17 basis points to CET1 group credit risk and be neutral to run rate earnings. We continue to strengthen risk based capital levels with our CET1 ratio increasing to 9.6% at the end of the quarter.
As I just noted, the pro forma CET1 ratio would increase by another 17 basis points after considering the impact of the upcoming loan sale. The pro forma CET1 ratio marks the highest level in our history and will be in line with peer median levels from the most recent filings.
Our improved capital levels give us additional flexibility that is important at this stage of the economic cycle. Looking at our TCE ratio, we ended September comfortably above 7% increasing to 7.2%, which translates into 7.7 when excluding PPP loans. On the expense front, we are progressing well towards achieving our 2020 cost savings goal, reducing run rate expenses via optimizing our branch network and reducing operational costs to ongoing vendor contracts through negotiations.
On the revenue front, we are leveraging our new geographies to drive market share gains and fee based businesses, notably mortgage banking, capital markets, wealth and insurance to offset net interest margin pressure in the current low rate environment.
Let's now shift to the balance sheet. Spot balances, total loans were relatively flat compared to the prior quarter, excluding the transfer of $508 million of indirect auto loans to held for sale. Looking ahead, it's important to focus on the position of the balance sheet after the loan sale and excluding PPP. We remain focused on driving organic growth, that’s a $2.5 billion in PPP loans enter the forgiveness process and those balances wind down in the future.
Compared to the second quarter, average deposits increased 4% primarily due to 6% growth in interest bearing deposits and 7% growth in noninterest bearing deposits, which was partially offset by 6% planned decrease in time deposits. As Vince noted, core deposit growth generated by building on our commercial and consumer relationships remains a focus for us as we eliminated our overnight borrowing position and have ample liquidity to fund future growth objectives.
Let's now look at noninterest income and expense. Noninterest income reached a record $80 million, increasing 3% linked quarter, primarily due to significant growth in mortgage banking, as well as strong contributions from wealth, insurance and capital markets. Mortgage banking income increased $2.3 million as sold production increased 9% from the prior quarter with sizable contributions from the mid Atlantic and Pittsburgh regions and a meaningful improvement in gain on sale margins.
Wealth management and insurance revenues, each increased 10%. These segments benefiting from increased organic commercial growth from greater activity in the mid Atlantic and Carolina regions. Capital markets revenue, while down from a record level last quarter was again at a very good level of $8.2 million with these products continuing to remain an attractive option for borrowers given the environment.
Termination of $415 million of higher rate federal home loan bank borrowings resulted in a loss on debt extinguishment and related hedge termination costs of $13.3 million reported in other noninterest income. Offsetting these charges was the $13.8 million gain on the sale of the bank's holdings of Visa Class B shares, also reported in other noninterest income.
Turning to Slide 9, noninterest expense totaled $180.2 million, an increase of $4.3 million or 2.4%, which included $2.7 million of COVID-19 expenses in the third quarter compared to $2 million in the second quarter. Excluding these COVID-19 related expenses, noninterest expense increased $3.6 million or 1.9%, primarily related to higher salaries and employee benefit expense, higher production related commissions, lower loan origination salary deferrals, given the significant PPP loan originations in the prior quarter, add an extra operating day in the third quarter.
FDIC insurance decreased $1.3 million due primarily to a lower FDIC assessment rate from improved liquidity metrics. The efficiency ratio equaled 55.3% compared to 53.7%, which is reflective of the higher production related expenses noted previously.
Looking at revenue, net interest income totaled $227 million, stable compared to the second quarter as loan and deposit growth mostly offset lower asset yields on variable rate loans tied to the short end of the curve. Net interest margin decreased 9 basis points to 2.79% as the total yield on earning assets declined 20 basis points to 3.34, reflecting lower yields on fixed rate loans originated at lower rates, given the interest rate environment and the impact of a 19 basis point decline in 1-month LIBOR.
The benefit of our efforts to optimize funding costs was evident in a 17 basis point reduction in the cost of interest bearing deposits, which helped to reduce our total cost of funds to 56 basis points, down from 67 basis points. We're very pleased with the performance of our fee based businesses as they have supported revenue growth amidst the current low interest rate environment, demonstrating the importance of having diversification.
Turning to our fourth quarter outlook, we expect period and loans to be generally flat to September 30th, assuming no forgiveness of PPP loans, given the current timing expectations for the SBA to process requests. While we expect deposits to decline from third quarter levels, that's based on an expectation that customers increase their deployment of funds received through the government programs, we do expect to see continued organic growth from transaction deposits. I'll note that our assumptions do not include any further government stimulus programs for actions.
We expect fourth quarter net interest income to be down slightly from third quarter inclusive of the impact of the loan sale. We are not assuming any PPP forgiveness in the fourth quarter. Absent the loan sale, we would have expected net interest income in the fourth quarter to be flattish.
We expect continued strong contributions from fee based businesses with a similar level in capital markets and some reduction from record levels of mortgage banking. We expect service charges to increase continuing to rebound, given recent transaction volume trends. Looking at fee income overall, we expect total noninterest income to be in the mid to high $70 million range.
We expect expenses to be stable to up slightly from the third quarter, excluding COVID-19 expenses of $2.7 million. We expect the effective tax rate to be around 17% for the full year 2020. Lastly, we are in -- we are currently in the early stages of budgeting for 2021. Similar to 2019 and 2020, we will again seek to have meaningful cost saving initiatives, building on consecutive years of taking $20 million out of our overall cost structure to support strategic investments and manage the impact of the low interest rate environment.
Its taking considerable effort to bring our efficiency ratio down from over 60% in the past to the low to mid 50% levels we’ve been operating at currently. In addition to the scale gain from prior acquisitions, we have consolidated close to 95 branches in the past 5 years, which is about 25% of our current branch network.
We have always been disciplined managers of costs and it will be an important driver to return us to a position of generating positive operating leverage, and mitigate growth and expenses in 2021. We will share more details when we provide 2021 detailed guidance in January. Overall, we are pleased with the performance of the quarter in a very challenging environment.
Next Vince will give an update on some of our strategic initiatives in 2020.
Thanks, Vince. Now I'd like to focus on our progress regarding key strategic initiatives since our last call. In our consumer bank, we continue to focus on optimizing our delivery channels. The deployment of our new website has translated into higher digital adoption through increased website traffic, increased mobile deposit and exponential growth in the number of online appointment.
In the current environment, customer activity trends continue to shift towards digital channels with mobile enrollment up 40% compared to 2019 averages. In fact, we have seen both monthly average mobile and online users increased by 50,000 each compared with the 2019 average level. Regarding website traffic, monthly visitors are up nearly 70%. Looking at our physical delivery channel, we continue to execute our established ready program to optimize our branch network, which included more than 60 consolidations since may of 2018, making FNB one of the more active banks for branch consolidation.
We will continue to thoroughly evaluate additional consolidation opportunities as well as select de novo expansion across our footprint as consumer behaviors evolve. We recently announced plans to develop additional de novo locations, which will enhance our retail strategy and support our corporate banking efforts in these attractive new markets.
For example, our Charleston branches are performing exceptionally well with nearly $50 million of deposit growth compared to 2019. And these branches are currently ranked among the upper quartile for performance compared to FNB's entire retail network. This consumer growth works in tandem with our successful corporate banking efforts as the Charleston region has grown nicely with our South Carolina commercial loan balances approaching $200 million at the end of September.
We recently brought the wholesale bank and respective credit teams back into the offices on a rotational basis as we remain steadfast in supporting our customers while building momentum to carry into the next year. Given the impact from the government stimulus programs, customers have increased liquidity with lower commercial line utilization rates. A more normal environment offers upside moving into 2021.
Our model is built on local decision making and the high-touch relationship based approach, coupled with consistent investment in technology. This has served us well during the pandemic where our local bankers are in the market and working closely with our customers. As we built out certain high value fee-based businesses, such as treasury management and capital markets, we've embedded local specialists across all markets to support our commercial bankers efforts.
During this pandemic, where travel, physical mobility and face-to-face interaction is limited having well-informed decision makers directly located in our market, enables FNB to best support our customers. Together with our efforts in the wholesale bank, FNB has also benefited from our long-term consumer strategy clicks-to-bricks by investing heavily in our digital platform.
One key element necessary for FNB to continue to deliver attractive returns for our shareholders is our commitment to our employees. I am pleased to share that FNB was included for a 10th consecutive year as a greater Pittsburgh area top workplace by the Pittsburgh Post Gazette, signifying the strength of our culture with a decade of excellence and consistency. These results benefit our shareholders, and we would like to recognize the hard work and dedication of all of our employees who have made these results possible.
With that, I'll turn the call over to the operator. Operator?
Yes. Thank you. [Operator Instructions] And the first question comes from Frank Schiraldi with Piper Sandler.
Thanks. Just first on the NIM mechanics. Just, Vince, you talked about a flattish NIM next quarter. Obviously, it sounds like no PPP forgiveness, so I guess PPP will still be there and negatively impacting the margin, I guess. But just trying to think through the moving parts, think about reinvestment rates for securities going lower. Is there more room on the deposit side? And then, does purchase accounting accretion, does that play -- how does that play into the quarterly progression?
Sure, Frank. I would say a few things. The PPP is actually slightly additive to the margin by a few basis points when you include the fees that are being created in. So that as far as the kind of the look forward to the fourth quarter, I mean, I'm looking at the third quarter kind of being a bottom here, so kind of flattish from there. LIBOR has been stable for 15, 16 basis points. Really, the spot, beginning and end of the quarters within a basis point of each other. So I think LIBOR being stable from here helps. There's still more room on the interest bearing deposit costs side.
As we had in the slide, we brought it down 17 basis points to 55. The spot at the end of the quarter was 51. So you're kind of 4 basis points ahead as a starting point, and then we would expect kind of another 3 basis points a month improvement in the fourth quarter. So kind of 9 to 10 additional reduction in the cost of interest bearing deposits in the fourth quarter overall kind of supporting the margin. And then the other dynamic is just you have loans coming on at -- new loans coming on at lower rates, just given where rates are. So kind of if you run it all together and kind of get you to the flattish comment that we had in the prepared remarks there.
Got you. Okay. And then just in terms of the balance sheet actions, I get if you can accrete capital and there's really no impact to earnings, it seems like a win in terms of providing more flexibility, but just wondering if we should read anything more into the increased -- the increase in capital levels? I mean, you guys have always sought to operate with pretty streamlined capital. So is there any change to where you think, or any pressures, general pressures on the industry to where you think ratios need to go to and could there be additional actions to get there?
No, there's no change. We've been saying for at least the last year that we've been more actively looking at the asset side of the balance sheet and considering different options to kind of just optimize it to balance sheet position and the capital position. So they are underlying that other than we've been looking at indirect for a while and securitizing or selling a portion of the portfolio. We're remaining in that business, so we'll continue to generate new assets as we go forward. But then it was just kind of planets aligning.
There is a good opportunity to sell that at basically a slight gain, and then to boost the capital ratios, 17 basis points to CET1, about a 11 basis points to the TCE ratio in a non-dilutive manner, which just felt like a good smart thing to do right now. And then as we kind of come through and get more certainty about the economic environment and where everybody is going, there's opportunity for us to restart the share buyback program and this gives us some powder to do that. So it's really just looking at the opportunity that presented itself.
And then we also had -- we had to gain the Visa Class B shares that we’ve been monitoring for a while became very attractive so we can sell those, pay off some home loan borrowings that were at 2.59 rate kind of helping the run rate earnings going forward. So it just kind of made sense economically to do that. And again, like I said, create some more powder for share buy backs going forward.
Okay, great. And then just really quick, if I could just ask Gary, do you provide, or would you provide where criticized and classified the trend from 2Q into 3Q?
Yes. Let me walk you through that, Frank. I mean, as I mentioned in my remarks, we conducted another really deep dive review of the borrowers operating in the hardest hit COVID sensitive industries and we really looked at about $3 billion of the total portfolio pulling in a few other credits that maybe slightly impacted. We wanted to be proactive in building reserves where appropriate against these hardest hit borrowers under the current economic environment. And this review was important from the bank's perspective.
Really a handful of our senior group reviewed these relationships with our regional credit officers, one-by-one over a 4-day period to really assess these up to date positions on each borrower. And we took aggressive risk rating actions against the COVID impacted portfolios, primarily the hotel and restaurant portfolio. And we moved about $350 million of that into classified and about $79 million into special mention. We are essentially migrating about 90% of the hotel portfolio and about 25% of the restaurant portfolio to prudently build reserves against these pieces of business that are impacted by the COVID economy.
Just finishing up there in total, we also included some retail IRE. We've built during that quarter $22.5 million of the total of $27 million provision against these portfolios. So it was pretty meaningful piece, which we felt was the prudent thing to do. Overall, when we look at these industries and building these reserves and reviewed these credits, we were really pleased with the positions of the majority of the borrowers across the space, and we remain confident they'll weather the storm.
Finally on deferrals. The deferrals are heaviest in the hotel space, as you would expect right at about 53%. Restaurants are very low at this point, only 12% and retail IRE only 5.6%. So overall pleased with that review and the reserve positioning that we were able to accomplish during the quarter.
Great. Thanks for all the detail.
Thanks, Frank.
Thanks, Frank.
Thank you. And the next question comes from Casey Haire with Jefferies.
Yes. Thanks. Good morning, guys.
Good morning, Casey.
A couple of questions on the PPNR front. First off, housekeeping, the purchase accounting adjustment in the quarter. How much was that?
The PCD accretion was $11 million in the third quarter. Just for reference, it was $13. 2 million in the second quarter.
Okay, excellent. And then, so the 4Q outlook it looks like revenues --you're calling for revenues to be down, obviously, mortgage banking was very strong and normalization is to be expected, but I'm just curious why wouldn't expense it? What's keeping the expenses stable to slightly higher? Why wouldn't we see leverage in the fourth quarter?
I think in the fourth quarter, you typically have certain things at the end of the year. You have -- first of all, mortgage is still going to be strong in the fourth quarter. So we're going to have commission related expense that will be at a heavy level again, corresponding with the revenue course. You have incentives at the end of the year, depending on all the different business units and how they close out the year. So kind of that's a component you typically see in the fourth quarter. So, I mean, there's nothing unusual there. I mean, we're managing costs. As we've talked about earlier in the year, we've basically removed $40 million from our overall cost structure for the last two years with a goal to reach a 3-year level of $60 million. So we took 20 out last year, we're going to take 20 out this year, and that's kind of been a process throughout the year to a combination of branch optimization, continue to renegotiating the contracts, process improvement and everything that we do every day. So those efforts are continuing and helping to pay for kind of some of the investments in the strategic initiatives. So it's really just kind of normal activity, Casey, in addition to those items.
Okay. Very good. And just -- so the hotel book, the hotel and lodging book, specifically the hotel book, the -- apologies if I missed this, how much did of the charge-offs were driven by the hotel book? And then what is the -- what do we expect in terms of loss trajectory going forward from the current level in the third quarter here, and as well as deferral strategy specifically for the hotel book, just given half of it is in still in deferral?
Yes. In terms of the charge-offs, Casey, the charge-offs were just a little over $3 million in that portfolio. And as we look forward, I mean, we're going to continue to work with those borrowers. We were pleased with the review of that book of business, as I've mentioned. Some of those borrowers are going to have a tougher time than others, and we'll work through those particular accounts. That's why we built some reserve against that portfolio. I mean, it's the hardest hit industry under this COVID economy that we have seen. So we'll take appropriate actions as we move through the fourth quarter and manage it accordingly. There's only -- there was only one new nonaccrual during the quarter in that book of business. And we reviewed every credit over $2 million. So that gives you a feel for where we sit at the moment and we'll continue to stay ahead of that portfolio as we move forward.
Okay. Very good. And just last one, Gary. I think you mentioned or maybe it's Vince, the indirect auto portfolio that you're selling, you do expect to sell that at a gain. And so there's no -- that can be a loss or there's no reserves built on that portfolio?
No, it actually came in. We were able to sell it a little bit better than what we expected through dealer reserves and all kinds of things on the books there. So we were able to sell it at a -- kind of a slight premium to par and then you have the reserve component of it also. It was -- the execution was better than kind of what we were going in with.
Okay. So I'm sorry, so was that portfolio has already been sold or I thought it was due to be closed in November?
Yes. It's in held for sale, Casey. You're right. It's held for sale. It's all executed as of yesterday. It'll close in the fourth quarter, but it's in the held for sale bucket on the balance sheet 9.30.
Understood. Thank you.
Thank you. And the next question comes from Michael Young with Truist Securities.
Hey, thanks for taking the question. I wanted to start on kind of the expenses as a follow-up. You've kind of mentioned the $20 million of additional cost saves that were kind of already targeted for 2021. Obviously, the revenue environment is going to be challenging and some headwinds still on that kind of year-over-year basis. So you'd expect more of those cost saves to drop to the bottom line next year, or is it better to think about it in terms of efficiency ratio next year, and you guys just maintaining that positive operating leverage, so efficiency ratios should be stable to better?
Yes, I would say, I mean, we continue to have some strategic initiatives that we've been working on during the year, upgrading our teller platform and the system in the branches are fixed -- [indiscernible] our initiatives. So I think that the kind of cost savings goal for next year would be to mitigate any increase in expenses with the goal of getting back to generating positive operating leverage, like you said. I think that's a key goal for us, it's been in the past and the goal is to return to that. So, I mean, it clearly goes to the bottom line, right, because it's going to offset other costs increases.
So there's clearly an EPS benefit to that. And like we're in the early stages of our budgeting process, Michael. So it's -- we are going to be talking about it in detail and help with kind of list of the items that we have in the past. So -- well, in January, we're refreshing up, I guess, the outlook for next year once we finish that process. But there's a goal to, like I said, get a 3-year level with 60 and then we'll finish the process and share any more information we have in January. And I think it's important, too, that we've mentioned in my prepared remarks, we closed 95 branches over the last five years, 25% of the network. And we'll continue to look at optimizing the network and customer behaviors have changed as we are in this pandemic. And some of that will be permanent, some of it may not. We don't really know yet, but we'll continue to look, still have a lot of branches. We continue to look at opportunities there, kind of optimize the overall network and see how customer behaviors come out of the pandemic.
That's helpful. And maybe this is more a question for Vince, but I guess over the last year or two, you guys have done a good bit of reinvestment in some of the digital initiatives, new branch openings, et cetera. So it seems like maybe a lot of that's behind you. So there would be more of an opportunity for some cost saves to drop to the bottom line. But I guess, just to put that against the new branches in Charleston, et cetera, that have obviously been doing well. And so just kind of generally trying to think about your thoughts there on reinvestment and new initiatives versus, maybe just taking a pause or a breather on some of that stuff.
Yes, I think, we developed a longer term view that we're in the second cycle of our 3-year strategic planning process. We've mapped out our CapEx investment and technology. So we sit together, discuss where we want to be at a future point. Then we devise budgets, our CapEx budget, and then we layer it into our forecast. So we -- what that does is, it requires us to cover those investments on an ongoing basis, which we have. And that's what you're pointing out in your statement. I think that we're in really good position as we move forward to continue executing our plan.
We're going to continue to add elements to our digital offering. Soon, we'll be able to originate a whole variety of loans on our website. We've pretty much completed the depository side. We are moving on to the loan side. And then the third piece of it is -- are the fee based businesses that also be integrated into that digital platform. What that does for us is it gives us the ability to market our banking services, products and services globally without a physical presence, and open accounts end-to-end on our platform. And if you -- if you've looked at our website, you'll see that we've changed the format of the website. It's very unique. It's a very unique experience where you can put multiple products into a shopping cart and then purchase multiple products at one-time.
Our goal is to continue to streamline that process for the consumer so that they only need to fill out one application and they can open both loans and depository products or other products in a very streamlined fashion. The interactions with the customer base relative to the PPP has significantly amplified the exposure to our website. So the number of clicks on our website has gone up, as I said, exponentially. That’s very helpful for us, because we’ve embedded digital content into our website about those products and services. So people can shop around, use the healthy decide tools, buy other products other than just depository products or schedule appointments, we mentioned appointment scheduling, that was all done prior to the pandemic.
So as we move through this and we started to everyone was kind of forced into using a digital environment that played very well for us. That's why our deposit balances are up, our market shares up in a number of markets. We've had really great success with appointment setting throughout the pandemic. We've received numerous awards about our response to the pandemic. And we significantly outperformed larger banks just about any bank in the first round of PPP with an 83% capture rate. We set up everything on our -- with a digital -- with our digital channel with a portal and basically it was an end-to-end process that was fully digital. Like very few banks were able to do that. So I think we're in a position where we can start to leverage that as we get through the pandemic and deal with the pandemic. I would not read into our decisions to bolster capital. I think that's been something we've stated even prior to the pandemic.
We felt that particularly CET1, we could improve that, increase our levels relative to peers now where it's a pure median, I think on a pro forma basis. So we've come a long way. The actions that we took with the portfolio made complete sense. It was a very good move for us because at bolstered capital, we did not impair earnings capacity moving into next year. And it gives us flexibility from a capital perspective to buy back shares, to do whatever. So it opens the door for us. And that's been a stated objective. So I would not read into it. We have no pressure at all to change our operating strategy at this point. Anyway, I think there is an opportunity. I think if you look at the FDIC data, there were -- we were moving in the right direction even before the influx of PPP deposits.
Our noninterest bearing deposits are up substantially. I know the industry has experienced an inflow, but we've consistently built our low cost deposit base over time. So we're approaching the upper 20% -- 20% range in terms of low cost deposits relative to the total, we're 26%, 27%. So, I think, all of those things continue to move in the right direction and the markets that we moved in, I was just down in the Carolinas. There's a lot more activity in the Carolinas in general with hospitality, with restaurants, even the industries that are being impacted, there's much more activity than there is in the Midwest or the Northeast. Anyway, that's the answer. Sorry for the long answer.
No, that's okay. That was a good overview. And maybe just one last one for me, for Gary. Just I think it was asked before kind of about the -- maybe the timing of charge-offs or resolution of some of these credits. Is there any sort of update or thoughts in your mind on when some of these may kind of come to resolution? Is that first half of '21, or will there be extensions and restructurings that might kind of draw it out over a longer period next year?
Yes, I would say, Michael, as you know, we're very proactive in not kicking the can down the road. I mean, we aggressively address problem credits and manage them and try to move them if possible. In terms of expected losses, I think we've talked in the past a little bit about industry losses, moving upwards as you move into 2021 and through 2021. So I would expect that to occur. I would -- looking at the industry in Q4 as well, you'll probably see losses start to increase at that point based on the environment that we're in, but I think you'll see those accumulate through 2021.
Okay. Thanks.
Thank you. And the next question comes from Russell Gunther with D.A. Davidson.
Hey, good morning guys.
Good morning, Russell.
Just wanted to follow-up on the auto sale. So it makes a ton of sense and there's a culture of derisking at FNB. Wondering if there's opportunity for continued optimization without sacrificing much in the way of earnings power, or was the deep dive review that you guys did in the portfolio this quarter, really ring-fence this opportunity, and we should consider this more of a one-off move?
Yes, I would say, we're always evaluating also as you know opportunities. If there's things that come to light, it makes sense to us that are in the best interest of the shareholders and make good financial sense, we'll do it. So we're always looking at all the different elements of the balance sheet. And here this quarter, we had an opportunity to, like I said, with kind of planets lining up to pull some things together and make a smart financial decision that helps boost capital, maybe some buffer going forward and like I said, it creates ability to buy back shares. So we'll continue to look and there may be other opportunities as we go down the road. So kind of a quarter-by-quarter thing.
Any portfolios in particular where you think you might have a better opportunity as you had continued to analyze that?
Russell, I think we're going to look from a risk perspective as well as the commercial book. We've sold mortgage loans in the past. We sold Regency. So we got out of consumer finance at the right time. I think we're going to continue to evaluate what we have in our portfolio. We're going to look at returns on those assets, and we're going to look at the risk profile associated with holding those assets long-term and we get together and we make decisions about moving certain assets off the balance sheet. I think we've done it very effectively. And I think Gary and his team has done a great job. And Gary and the whole credit team has done a great job of addressing future risks.
I appreciate you …
[Multiple speakers] on a quarterly basis, Russell, as we always do.
Our goal is to get through this so that we're in a really strong position on the other side of it. So understand that we're here managing through this situation. We understand with a great degree of clarity, what we face. I think we've addressed various elements of it very successfully, and we're going to continue to position the company so that we're in a position of strength post pandemic crisis, the economic side of the pandemic crisis.
Thanks very much guys. I appreciate it.
Russell, thanks.
Thank you. And the next question comes from Collyn Gilbert with KBW.
Thanks. Good morning, guys.
Good morning, Collyn.
Maybe if you could just start with a little bit of discussion around kind of the loan pipeline and what the sentiment is of your commercial borrower right now, kind of how they're thinking about their businesses when you think -- maybe they start to reinvest in the business. And then also to just some color from a geographic perspective, if you're seeing why variances from your Carolinas franchises versus what you're seeing, kind of in the Pennsylvania, Ohio markets?
I think the commercial borrowers and Gary can answer as well, the commercial borrowers have been a little more conservative. We're in an election year, there's a lot of things that can potentially change relative to their businesses we've just gone through. We're still going through the pandemic, so that's not over yet. So I think there's been a little bit of caution in terms of capital investment. We were just talking about that before the call started. So that puts a little bit of damper on loan demand, but there's still a lot of conversation. I would say that most of the industries that have not been directly impacted by COVID are performing okay or pretty well.
So remarkably the economy outside of those industries that are obviously directly impacted that Gary mentioned hospitality, the restaurant businesses, they were impacted pretty heavily. But I think that as you look at the book, there's a certain degree of optimism within that customer base that we're going to get through this and things aren't so bad. When you look at utilization rates online, the utilization rate for us is down. Now we have a more middle market, a small business customer base, so they've benefited from PPP funding and other subsidies or other opportunities to reduce their working capital facilities because they're not investing as heavily in inventory or other cash consuming assets. But I think that when you look at it, we're running at a point where there's some upside as the economy starts to turn around.
I think geographically, the manufacturing sector is kind of flattish, they're starting to see improvement. So the Midwest and the Northeast is probably lagging a little bit. The South, as we look into the Carolinas, Raleigh has a very strong pipeline, Charlotte is starting to see more activity. Charleston, I mentioned in my prepared comments has done exceptionally well and continues to see opportunities. There continues to be a migration of people into the Charleston MSA. I mean, they're adding 32 people a day mostly from the Northeast. So there's opportunities there from a mortgage perspective or retail banking perspective and with businesses -- there's business formation in that market. So it seems to be pretty active. We've expanded our commercial activities in Asheville, North Carolina and Greenville. So we're starting to see some good activity there. The Carolinas are really doing well. And I'd say the Midwest and the Northeast has been relatively stable for us, both from a credit perspective than a growth perspective. I don't know, Gary, if you want to add anything?
Yes. Collyn as Vince mentioned, I mean, the borrowers are facing a lot of uncertainty at the moment. The election actually as I’m thinking and they've been on hold with it for a little while in many cases. The pandemic still continuing also is on there -- on the top of their mind. So those two major uncertainties are critical to their investment going forward. That being said, as Vince mentioned also, some of the borrowers are doing extremely well even in this environment and are investing today. Some are on hold. The commercial line utilization rate has reached an all-time low, we're now at 32%. So that continues to reflect the borrowers' decisions to pay down debt, go to cash and to handle some of this uncertainty from a conservative standpoint. So I think, they're approaching it directly. But what it tells me is on the backside of this, there's a lot of opportunity for the industry going forward from a loan demand and a growth perspective. So we're looking forward to getting on the backside of it.
Okay. That’s helpful. And then just, Gary, a question for you, I appreciate all the color that you're giving us on kind of net charge-offs. Unfortunately, it's a component of our models that we have to be -- model with a lot more precision now, obviously given CECL. So -- which is probably why we're asking a lot of questions on net charge-offs. But just in terms of -- so let me ask, so the -- as you look out in terms of potential losses, is it safe to say that you do see greater near-term pressure mostly just on the COVID related segments? Are you not seeing cracks or you not anticipating kind of outsized losses, maybe in the other segments of the book?
I will tell you, Collyn, that the book is holding up very nicely. We're very pleased with the performance of it. The softness as we've discussed today is really in that COVID sensitive area, the hotels, the restaurants. And as I mentioned, I mean, the restaurants were a pleasant surprise to me. I mean, I sat down with the team over that 4-day period and went through these accounts one-by-one. And that total review looked at $3 billion worth of impacted and potentially impacted credits. I walked away from that feeling very good. And the reserve build that we talked about earlier was in the areas where it needed to be. So I think you'll see what losses come through, I think you'll see it in those COVID sensitive areas without a doubt. And again, we think a lot of that book has a lot of positive things happening in already. Occupancy levels are up, very improving. A heavy dose of that is in the Carolinas. We got it through the acquired book. As we've talked, those areas are more active. So we're seeing some positive occupancy levels start to make some headway there. So hopefully that helps answer your question, but it's kind of really concentrated in that COVID impacted sector.
Okay. That is. And then just one final question on that front. Do you happen to have what the LTV, kind of the average LTV is on the -- on your hotel and lodging book, kind of a $360-some-odd-million I guess, you're kind of [multiple speakers]
Yes. You're right, that's about 65%, Collyn.
Okay, great. All right. I will leave it there. Thanks, everybody.
Thanks.
Thanks, Collyn.
Thank you. And the next question comes from Matthew Breese with Stephens, Inc.
Good morning, guys.
Good morning, Matt.
Hi, Matt.
Hey, just a few. First, what was the average balance of PPP loans for the quarter? And then, do you have the total PPP related income?
Yes, the average balance $2.5 billion for the third quarter, and kind of the total net interest income, it runs about $21 million a quarter, including the coupon at 1% plus the fees that come in.
Okay.
And that's net interest income.
And then, the $508 million of indirect auto loans, what was the yield on that?
Yes, the gross yield was about 5%.
Okay. And then you mentioned potentially selling more of this product. Could you just give us a sense for the overall origination activity over the course of the last year? And if you were to repeat this, how much of that would you like to sell versus retain?
Yes. No, just to clarify, I was saying that in the past, we've been looking at this asset class for a while as far as potentially securitizing or selling the portion. So, at this point, we don't have any plans to sell any additional slugs of it. This was just a result of that review we've been doing for the last year or two. So, just to clarify that.
Got it. Okay. And then, I know you …
Yes, what it does for us is it -- you know it would built out the infrastructure to service. So it provides us with an opportunity to sell in the future that's I think we will …
Yes on a flow basis [indiscernible].
On a flow basis. We're going to look at it from an economic perspective, what's best for the shareholders from a return on capital standpoint, that's how we manage it going forward.
So, that's a good point. Yes, I was referring to kind of a bulk sale, but Vince is right, we have the capacity to be able to do it.
Yes, I don't think -- I'm not going to suggest that in this environment we are going to start ramping up that business, we are not. We're just -- we just wanted to have the capability to move those assets off the balance sheet efficiently when the pricing is right, and the stars align and that's -- going through this exercise was -- completing the ability to do that gives us another option in terms of capital management.
Okay.
Does that makes sense?
Yes. No, that makes perfect sense. And then, I know you provided some broader fee income guidance and you do expect mortgage to normalize. But could you talk a little bit about the capital markets lines of business, and what the pipeline and activity there looks? How repeatable is what you saw this quarter?
Yes, I think this quarter was a little more normal than the previous quarters. I mean they were just outrageously good because of the steep decline in interest rates. Really that is, it hinges on our ability to originate new volume. So, as we see the pipeline start to pick up, there is opportunity for us to sell derivative products to customers. Our syndication's pipeline looks very solid. So that's been generating a decent amount of fee income recently. And as we continue to elevate our name, our brand in the new markets that we are in. We are seeing more and more opportunities to lead transaction. So we would expect that business to continue to grow as we move through the cycle. And we've -- as I've said we had some great success there recently and we expect that to continue.
Then there is other areas that were part of our three year strategic plan that we're essentially building out today. So eventually, we may provide advisory services, both municipal finance and corporate finance advisory services. We were establishing a broker-dealer to benefit from fee income for our larger clients that access debt through the capital markets. So there are certain things that we're doing that will enhance fee income in the future. So it will augment the derivative fee income that we garner. Is that helpful?
Yes, it's very helpful. I appreciate it. That's all I had. I appreciate taking my questions. Thank you.
Okay. Thank you, Matt.
Thank you. And the next question comes from Jared Shaw with Wells Fargo.
Hi, good morning. This is actually Timur Braziler filling in for Jared. Just a couple of follow-ups for me. Maybe starting with, Gary, the 65% loan to value on the hotel and lodging portfolio. I guess, how was that derived? I'm assuming it's pretty challenging to do appraisals right now, given that cash flows are still impacted. So looking at that book, I guess, how comfortable are you with that 65% loan to value? And maybe expanding that to the current allowance level, as we start seeing some incremental losses flow through in the next few quarters, is the expectation that the reserves already established will offset those losses or do you think you're going to have to backfill the allowance to account for the new losses coming in over the next couple of quarters?
Well, we've built reserves based on the performance of each credit and the position of each credit in that portfolio during the quarter. So we essentially went through that entire book, Timur, and positioned it appropriately for where it sits today. As mentioned earlier, we only moved one account to non-accrual status during the quarter. So you know that's an account that is in a problem state. We are working through right now as we sit here today. So, I can't speculate on every single asset that may or may not default in that book. But at this point -- as I mentioned earlier, we feel good about the review and there are some credits in there that are a little more challenge than others, but overall, it was a positive view of that book of business. Some of them will default for certain under the environment that we're in. As far as the LTV, it's based on LTVs at the original underwriting. So you would expect that to come down over time. At 65%, we got a fairly good cushion going into those things. So when you look at potential defaults in that book and pick an expected reduction in valuation, the loss content on the defaulted ones should be minimal, but there will be loss content on those assets that are not able to continue.
Okay, that's good color. Thank you. And then just last one for me. Looking at the commercial real estate growth in the quarter, I guess what industries are you seeing strengthen there? And as you look ahead, is the expectation that balances climb higher or should we expect some sort of retrenchment given how impacted some of the CRE verticals remain?
Yes. And we've seen some strength in the commercial and industrial space. Multifamily has held up well and warehouse as well. So those are kind of the segments. We are not seeing a lot of new activity in the multifamily space by any means, but it's primarily that commercial and industrial warehouse where we have seen some activity.
Thank you for the color.
Sure thing.
Thank you. And the next question comes from Brian Martin with Janney Montgomery.
Hey, good morning, guys.
Hi, Brian.
Hi, Brian.
Hey, just one question, back to capital for a minute on the -- where do you think you stand on the buyback given the conversation this quarter, Vince, about the pickup on the pro forma capital levels, just as you think about that.
I think just looking for some more clarity about the environment, Brian, kind of once you're -- you feel that there is a kind of light at the end of the tunnel here and more comfortable with where things are going, that we would start to resume the share buyback. So it's in place, it was fully authorized. We are kind of ready to go once it feels like the right time to do it. And with stock trading below tangible book value, it's very attractive. So it's definitely a trigger we would pull, once we just kind of have a little bit more certainty about where everything is going.
Got you. Okay. Perfect. And then how about just -- I know you said nothing on the PPP forgiveness this quarter, just your anticipation of how that plays out, or based on what you're seeing with your customers there? I mean, is it first quarter and second quarter as most of it get done in the first quarter you’re thinking now?
I guess, our current thinking based on the SBA process would be kind of 40%, and this is just our guesstimate really. 40% in the first quarter, kind of another 50% in the second quarter, and then we have a 10% tail kind of at June 30 that would just kind of run down from there. But we have, as Vince was commenting on the process we built for the origination side, we've also built a portal for the forgiveness side and kind of have that kind of ready to go now that the SBA has put out how they want things to work. So kind of we're going to be ready to go and expect to start submitting those in November and early part of November. But the practicality of it is, we don't know how long it's going to take for the SBA to turn those decisions back. So that's why we are kind of assuming first quarter to really start that.
Yes. Okay, perfect. And then maybe just one for Gary on that. On the retail IRE, Gary, I guess the added reserve this quarter, just where are the bigger concerns in that portfolio today, I guess as you kind of did your deep dive? And you've talked a lot about the hotel and the restaurants, but just that retail IRE, what should we be thinking about there? Where you guys are focused on?
Yes it's -- that book we built about $7 million of reserves in it, and it really Brian, only move that reserve position up slightly. It's a fairly sizable book, and it was just a few credits that had some retail related exposure where the bar -- where the tenants where more impacted. It's a portfolio that we feel very good about. We are not seeing any concerns in it whatsoever. The deferral rate is just a touch above 5% on it at this point. So it's just a few one-off tenants really is what it is. And when you look at the LTVs there, again, they're running right at 65%. So it's a very well-positioned book, we feel very good about it at this point.
Okay. And just, Gary, just bigger picture, I mean, I guess the reserve build this quarter wasn't too much. I guess, do you feel like it's largely done at this point based on how it seems like things in credit that are doing pretty well. I guess, is that kind of a big picture read as you sit there today?
Well, when you look at the CECL reserve around the economy starting to show some signs of improvement. I mean we wouldn't expect any additional deal from a CECL economic forecast standpoint as you move forward. I mean actually you may see some improvement there, if the economy continues to improve and an opportunity to have some benefit there. I mean, I think it's a little too early to start releasing reserves here as we sit today. But based on the reviews that we did, we took a heavy look and an aggressive view of the COVID impacted environment, subject to it getting worse, I mean, we feel pretty good about where we are and as you look into the next quarter, hopefully we can continue to move that downward a little bit.
Yes. Okay. All right. I appreciate it. Thanks, guys.
All right, Brian. Thanks.
Okay, I have just one clarification. There was a question earlier on the indirect portfolio as far as the yield, which I know is for modeling purposes. One thing I forgot to mention is that the life on that portfolio, we sold is about 22 months, so it's very short. So just to make sure for those of you that are modeling that, we kind of have that data point.
Thank you. And as it was the last question, I would like to return the floor to management for any closing comments.
Thank you. I appreciate the call -- all the questions on the call. I think that there were a lot of very good questions, and hopefully we provided you with significant disclosure relative to your questions. And I'd like to thank the team, particularly all of the employees that have stepped up during this time period. I mean it's been remarkable. Gary, and Tom and the credit team have done a fantastic job guiding us through what was a very scary and difficult environment, at least early on. So I think we are coming through this and we are feeling better about where we are and we are very hopeful that as we move into the next quarter, and into the next year, we have more clarity from a credit perspective and we are in a better position to focus on revenue growth again. So thank you everybody. Appreciate the time and look forward to the next call. Take care.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phone lines.