FNB Corp: Form 10-Q for the period ended Mar 31, 2024

MD&A represents an overview of and highlights material changes to our financial condition and consolidated results of operations at and for the three-month periods ended March 31, 2024 and 2023. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained herein and our 2023 Annual Report on Form 10-K filed with the SEC on February 26, 2024. Our results of operations for the three months ended March 31, 2024 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) supervision, regulation, enforcement and other actions by several governmental agencies, including the FRB, FDIC, Financial Stability Oversight Council (FSOC), DOJ, CFPB, UST, OCC and Department of Housing and Urban Development (HUD), state attorney generals and other governmental agencies whose actions may affect, among other things, our consumer and mortgage lending and deposit practices, capital structure, investment practices, dividend policy, annual FDIC insurance premium assessment and growth, 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 significant adverse industry and economic events can also impact our ability to respond to customer needs and meet competitive demands.
• Business and operating results can also be affected by difficult to predict uncertainties, such as widespread natural and other disasters, wars, pandemics, including post-pandemic return to normalcy, global events and geopolitical instability, including the Ukraine-Russia conflict and the military conflict in Israel and Gaza, shortages of labor, supply chain disruptions and shipping delays, terrorist activities, system failures, security breaches, significant political events, cyber-attacks, international hostilities or other extraordinary events which are beyond our control and may significantly impact the U.S. or global economy and financial markets generally, or us or our counterparties, customers or third-party vendors 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, more aggressive approaches to supervisory or enforcement priorities with consumer and anti-discrimination lending laws by the federal banking regulatory agencies and the DOJ, 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.

• Ability to continue to attract, develop and retain key talent.
• 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.
• Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or 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, including financial and other types of commitments, and in additional expenses and collateral costs, and may cause reputational harm to us.
• 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.
• Increased funding costs and market volatility due to market illiquidity and competition for funding.

We caution that the risks identified here are not exhaustive of the types of risks that may adversely impact us 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 2023 Annual Report on Form 10-K (including the MD&A section), our subsequent 2024 Quarterly Reports on Form 10-Q (including the risk factors and risk management discussions) and our other 2024 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 (http://www.sec.gov). 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 2023 Annual Report on Form 10-K filed with the SEC on February 26, 2024 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, 2023.

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, operating return on average tangible common equity, return on average tangible assets, tangible book value per common share, the ratio of tangible common equity to tangible assets, operating non-interest expense, 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, preferred deemed dividend at redemption, FDIC special assessment, loss on indirect auto loan sale 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. 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 2024 and 2023 were calculated using a federal statutory income tax rate of 21%.

FINANCIAL SUMMARY

Net income available to common stockholders for the first quarter of 2024 was $116.3 million or $0.32 per diluted common share, compared to net income available to common stockholders for the first quarter of 2023 of $144.5 million or $0.40 per diluted common share. On an operating basis, earnings per diluted common share (non-GAAP) was $0.34 for the first quarter of 2024, excluding $0.02 of significant items impacting earnings per diluted common share, while the first quarter of 2023 was $0.40, excluding less than $0.01 of significant items impacting earnings per diluted common share.

A key contributor to our earnings this quarter was a near-record level of non-interest income totaling $87.9 million as capital markets, wealth management, treasury management and mortgage banking produced strong results. Our continued profitability grew our capital base and led to a record tangible common equity ratio (non-GAAP) of 7.99%. Tangible book value (non-GAAP) grew 11%, year-over-year, reaching an all-time high of $9.64 per share. We experienced strong credit results in this environment which is a testament to our risk management culture with net charge-offs of $12.8 million, or 0.16%, and delinquencies and non-performing assets remaining at or near historically low levels. We experienced growth in the number of customers and prospects opening multiple accounts since introducing the Common Application to our eStore® platform, contributing to year-over-year growth of 6% and 2% for loans and deposits, respectively.

Income Statement Highlights (First quarter of 2024 compared to first quarter of 2023, except as noted)

• Net interest income decreased $17.6 million, or 5.2%, to $319.0 million primarily due to higher deposit costs, including migration to higher yielding deposit products, as well as higher total average borrowings, partially offset by growth in earning assets and higher earning asset yields.
• Net interest margin (FTE) (non-GAAP) decreased 38 basis points to 3.18% as a 72 basis point increase in the total yield on earnings assets (non-GAAP) was more than offset by total cost of funds increasing 115 basis points.
• On a linked-quarter basis, the net interest margin (FTE) (non-GAAP) decreased only 3 basis points to 3.18% as a 15 basis point increase in the total yield on earning assets (non-GAAP) to 5.40% was more than offset by a 19 basis point increase in total cost of funds to 2.33%.
• The provision for credit losses of $13.9 million supported loan growth and net charge-off activity.
• Non-interest income totaled $87.9 million, benefiting from our diversified business model with strong contributions from mortgage banking, capital markets and record wealth management revenues.
• Non-interest expense totaled $237.1 million, a decrease of $28.5 million, or 10.7%, on a linked-quarter basis. The first three months of 2024 included significant items of $1.2 million (pre-tax) of branch consolidation costs and $4.4 million (pre-tax) of FDIC special assessment, partially offset by a $2.6 million (pre-tax) reduction to the previously estimated loss on the indirect auto loan sale. The first three months of 2023 included a significant item of $2.1 million (pre-tax) of merger expenses. On an operating basis, non-interest expense (non-GAAP) totaled $234.1 million and increased $16.2 million, or 7.5%, when adjusting for significant items of $3.0 million in the first three months of 2024 compared to $2.1 million.
• The effective tax rate was 21.5%, compared to 19.5%, due to lower stock compensation vesting deductions and higher levels of proportional amortization on certain tax credit investments.

Balance Sheet Highlights (period-end balances, March 31, 2024 compared to December 31, 2023, unless otherwise indicated)

• On a linked-quarter basis, period-end total loans and leases increased $261.4 million, or 3.3% annualized, as consumer loans increased $208.7 million and commercial loans and leases increased $52.6 million. Average loans and leases increased $113.4 million, or 1.4% annualized, linked quarter, with growth of $253.8 million in average commercial loans and leases offsetting the decrease in average consumer loans of $140.4 million with the consumer loan decline due to the sale of $332 million of indirect auto loans which closed in the first quarter of 2024.
• Period-end total loans and leases increased $1.9 billion, or 6.2%, as compared to March 31, 2023, reflecting organic growth across our diverse geographic footprint. Commercial loans and leases increased $1.0 billion, or 5.3%, and consumer loans increased $873.8 million, or 7.8%. Our organic loan growth was driven by the continued success of our strategy to grow high-quality loans and deepen customer relationships across our diverse geographic footprint.
• On a linked-quarter basis, period-end deposits slightly increased $24.5 million, or 0.3% annualized, even with the seasonal outflows during the current quarter. The mix of non-interest-bearing deposits to total deposits was stable and equaled 29% at both March 31, 2024 and December 31, 2023.
• Total average deposits totaled $34.2 billion consistent with the prior year quarter, led by increases in average time deposits of $2.1 billion that offset the decline in other deposit categories as customers continue to migrate deposits into higher-yielding deposit products.
• The ratio of loans to deposits was 93.8% and relatively stable with the prior quarter.
• The ratio of non-performing loans plus OREO to total loans and leases plus OREO decreased 5 basis points to 0.33%. Total delinquency increased 4 basis points to 0.64%, compared to 0.60% at March 31, 2023. Both measures continue to remain at or near historically low levels.
• The first quarter of 2024 reflected net charge-offs of $12.8 million, or 0.16% annualized of total average loans.
• The ACL was $406.3 million, an increase of $2.9 million compared to March 31, 2023, with the ratio of the ACL to total loans and leases decreasing 7 basis points to 1.25% reflecting net loan growth and charge-off activity.
• Tangible book value per common share (non-GAAP) of $9.64, increased $0.98, or 11.3%, compared to March 31, 2023. AOCI reduced the tangible book value per common share (non-GAAP) by $0.70 as of March 31, 2024, primarily due to the impact of higher interest rates on the fair value of AFS securities, compared to a $0.65 reduction as of December 31, 2023, and a $0.87 reduction as of March 31, 2023.
• The CET1 regulatory capital ratio was 10.21% benefiting from retained earnings growth and the aforementioned indirect auto loan sale in the quarter, compared to 10.04% at March 31, 2023.
• On February 15, 2024, we redeemed all our outstanding Series E Perpetual Preferred Stock and the final preferred dividend of $2.0 million was paid on the redemption date. The excess of the redemption value over the carrying value on the Series E Perpetual Preferred Stock of $4.0 million was considered a significant item impacting earnings.

TABLE 1

RESULTS OF OPERATIONS

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Net income available to common stockholders for the first three months of 2024 was $116.3 million or $0.32 per diluted common share, compared to $144.5 million or $0.40 per diluted common share for the first three months of 2023. On an operating basis (non-GAAP), net income available to common stockholders for the first three months of 2024 was $122.7 million, or $0.34 per diluted common share, compared to $146.1 million or $0.40 per diluted common share for the first three months of 2023. Net interest income totaled $319.0 million, a decrease of $17.6 million, or 5.2%, compared to $336.7 million, as total average earning assets increased $2.0 billion, or 5.3%, including a $2.0 billion increase in average loans and leases from organic origination activity, partially offset by a $106.7 million decrease in average investment securities. The net interest margin (FTE) (non-GAAP) decreased 38 basis points to 3.18%, as the total cost of funds increased 115 basis points to 2.33% with a 132-basis point increase in interest-bearing deposit costs to 2.82%, as well as an increase of 28 basis points in long-term debt costs which includes the impact of additional liquidity following the banking industry disruption in 2023. These funding cost increases were partially offset by an increase in the yield on earning assets (non-GAAP) of 72 basis points to 5.40%, primarily due to higher yields on loans, investment securities and interest-bearing deposits with banks. Between March 31, 2023 and March 31, 2024, the FOMC raised the target Federal Funds interest rate by 50 basis points (with the last increase in July 2023). The provision for credit losses for the first three months of 2024 totaled $13.9 million, compared to $14.1 million. Non-interest income totaled $87.9 million, a 10.7% increase compared to $79.4 million, reflecting increased mortgage banking operations income, record wealth management revenues and higher levels of dividends on non-marketable equity securities, partially offset by lower insurance commissions and fees. Non-interest expense totaled $237.1 million, increasing $17.2 million, or 7.8%. On an operating basis (non-GAAP), non-interest expense totaled $234.1 million, an increase of $16.2 million, or 7.5%, compared to the first three months of 2023. Salaries and benefits increased $8.9 million, or 7.4%, due largely to normal annual merit increases and higher production-related commissions from strong non-interest income activity. Additionally, net occupancy and equipment expense increased $3.9 million, or 10.0%, largely from technology-related investments.

Financial highlights are summarized below:

TABLE 2

(in thousands, except per share data)

The following table presents selected financial ratios and other relevant data used to analyze our performance:

TABLE 3

(1) Non-GAAP

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

(dollars in thousands)

(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 (non-GAAP). 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 loans and leases consist of average total loans, including non-accrual loans, less average unearned income.

Net Interest Income

Net interest income on an FTE basis (non-GAAP) totaled $321.9 million, decreasing $18.0 million, or 5.3%, primarily due to higher interest-bearing deposit costs including continued migration to higher yielding deposit products in the current interest rate environment and higher total average borrowings, partially offset by growth in earning assets and higher earning asset yields. Average earning assets grew $2.0 billion, or 5.3%, primarily driven by organic loan origination activity. Additionally, we reinvested the proceeds of the AFS securities sold in December 2023 as part of our balance sheet repositioning with an average yield of 1.08% into securities with yields approximately 350 basis points higher and a similar duration and convexity profile. Total average borrowings increased $1.8 billion due to maintaining additional liquidity on the balance sheet following the banking industry disruption in 2023 and to support strong loan growth. The net interest margin (FTE) (non-GAAP) decreased 38 basis points to 3.18%.

The following table provides certain information regarding changes in net interest income on an FTE basis (non-GAAP) attributable to changes in the average volumes and yields earned on interest-earning assets and the average volume and rates paid for interest-bearing liabilities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023:

TABLE 5

(in thousands)

(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 $546.4 million for the first three months of 2024, increased $99.6 million, or 22.3%, from the same period of 2023, resulting from the interest rate increases by the FOMC and a $2.0 billion increase in average earning assets. The increase in earning assets was primarily driven by a $2.0 billion, or 6.5%, increase in average loans. Growth in total average commercial loans included $755.1 million, or 6.6%, in commercial real estate loans and $225.3 million, or 3.1%, in commercial and industrial loans, driven by a combination of organic loan origination activity led by the Pittsburgh, Charlotte, Cleveland and Raleigh markets. Average consumer loans increased $861.8 million, or 7.8%, with an increase in residential mortgage loans of $1.3 billion, or 24.4%, reflecting adjustable-rate mortgages held in portfolio on the balance sheet and the continued success of the Physicians First mortgage program, which is a program that provides a bundled suite of specialized products to meet the personal and professional needs of physicians, dentists, veterinarians and other healthcare professionals. Indirect installment loans decreased $401.8 million, or 26.1%, reflecting the $332 million indirect auto loan sale that closed in the first quarter of 2024. Additionally, the net increase in securities interest income was a result of replacing maturing securities with higher yielding securities, as the average total securities portfolio yield increased 60 basis points. For the first three months of 2024, the yield on average earning assets (non-GAAP) increased 72 basis points to 5.40%, compared to the first three months of 2023.

Interest expense of $224.5 million for the first three months of 2024 increased $117.6 million, or 110.1%, from the same period of 2023, primarily due to the higher interest rate environment and an increase in average interest-bearing deposits and borrowings. Average time deposits increased $2.1 billion, or 50.6%, given the continued migration into higher-yielding deposit products. Average short-term borrowings increased $838.8 million, or 53.7%, primarily due to an increase in short-term FHLB borrowings of $682.6 million and average long-term borrowings increased $975.8 million, or 90.2%, primarily due to an increase of $1.2 billion in long-term FHLB borrowings, as we have maintained additional liquidity following the banking industry disruption in early 2023 and in a continued effort to support strong loan growth. The rate paid on interest-bearing liabilities increased 144 basis points to 3.14% for the first three months of 2024, compared to the first three months of 2023, as the cost of interest-bearing deposits increased 132 basis points from 1.50% to 2.82%. These increases were primarily due to increased deposit competition and market trends resulting from the interest rate actions taken by the FOMC and the banking industry market disruptions that occurred in early 2023.

Provision for Credit Losses

The following table presents information regarding the provision for credit loss expense and net charge-offs:

TABLE 6

(dollars in thousands)

The provision for credit losses was $13.9 million, compared to $14.1 million in the first three months of 2023. The provision for credit losses for the first three months of 2024 was primarily due to loan growth and charge-off activity. The provision for credit losses in the first three months of 2023 was primarily due to loan growth, CECL-related model impacts from forecasted macroeconomic conditions and charge-off activity. Our non-performing loan coverage position remains strong at 389%. The first three months of 2024 reflected net charge-offs of $12.8 million, or 0.16% annualized of total average loans, compared to $13.2 million, or 0.18% annualized, in the first three months of 2023. The ACL was $406.3 million, an increase of $2.9 million, with the ratio of the ACL to total loans and leases decreasing 7 basis points to 1.25%, reflecting net loan growth and charge-off activity.

Non-Interest Income

The breakdown of non-interest income for the three months ended March 31, 2024 and 2023 is presented in the following table:

TABLE 7

(dollars in thousands)

Total non-interest income increased by $8.5 million, or 10.7%. The variances in significant individual non-interest income items are explained in the following paragraphs.

Wealth management revenues were at record levels and increased $1.6 million, or 8.8%, as securities commissions and fees and trust income increased 10.5% and 7.7%, respectively, through continued strong contributions across the geographic footprint.

Insurance commissions and fees decreased $1.0 million, or 13.3%, with lower contingent revenues compared to the year-ago quarter, combined with a book of business decline.

Mortgage banking operations income of $7.9 million increased $3.1 million, or 63.0%, driven by improved gain on sale from strong production volumes. During the first three months of 2024, we sold $329.2 million of residential mortgage loans, a 57.1% increase compared to $209.6 million for the same period of 2023.

Dividends on non-marketable equity securities of $6.2 million increased $2.1 million, or 50.8%, reflecting higher FHLB dividends due to additional borrowings.

62

Non-Interest Expense

The breakdown of non-interest expense for the three months ended March 31, 2024 and 2023 is presented in the following table:

TABLE 8

(dollars in thousands)

Total non-interest expense of $237.1 million for the first three months of 2024 increased $17.2 million, a 7.8% increase from the same period of 2023. On an operating basis, non-interest expense (non-GAAP) totaled $234.1 million and increased $16.2 million, or 7.5%, when adjusting for significant items of $3.0 million in the first three months of 2024 and $2.1 million in the first three months of 2023. See Table 9 in this section for a list of significant items. The variances in the individual non-interest expense items are further explained in the following paragraphs.

Salaries and employee benefits increased $8.9 million, or 7.4%, related to normal annual merit increases and higher production-related commissions from strong non-interest income activity. Included in salaries and employee benefits in the first quarter of 2024 and 2023 were $6.9 million and $6.7 million, respectively, related to normal seasonal long-term compensation expense.

Net occupancy and equipment expense of $43.4 million increased $3.9 million, or 10.0%, primarily from continued technology-related investments.

Outside services increased $3.5 million, or 18.0%, with higher volume-related technology and third-party costs.

Marketing expense of $5.4 million increased $1.7 million, or 46.7%, primarily due to the timing of marketing campaigns.

FDIC insurance increased $5.5 million, or 77.9%, primarily due to a $4.4 million estimated special assessment to further replenish the FDIC's Deposit Insurance Fund associated with protecting uninsured depositors following the failed banks in early 2023 based on updated loss information provided by the FDIC, as well as loan growth and balance sheet mix changes.

Other non-interest expense was $15.1 million and $18.7 million for the first three months of 2024 and 2023, respectively. The first three months of 2024 included a $2.6 million reduction to the previously estimated loss on the indirect auto loan sale.

The following table presents non-interest expense excluding significant items impacting earnings:

TABLE 9

(dollars in thousands)

(1) Non-GAAP

Income Taxes

The following table presents information regarding income tax expense and certain tax rates:

TABLE 10

(dollars in thousands)

Income tax expense was lower in the first quarter of 2024 due to lower pre-tax earnings. The higher effective tax rate compared to the first quarter of 2023 was driven by lower stock compensation vesting deductions and higher levels of proportional amortization for certain tax credit investments resulting from the adoption of FASB ASU 2023-02.

FINANCIAL CONDITION

The following table presents our condensed Consolidated Balance Sheets:

TABLE 11

(dollars in millions)

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. Loans held for sale declined $381 million, or 78.1%, from December 31, 2023 due primarily to the sale of $332 million of indirect auto loans that closed in the first quarter of 2024.

Following is a summary of loans and leases:

TABLE 12

(in millions)

65

The organic quarterly growth in commercial loans and leases was led by the Raleigh, South Carolina and Cleveland markets. For consumer lending, average residential mortgages increased $216.2 million, driven by growth in adjustable-rate mortgages. Our commercial real estate portfolio included $8.8 billion of non-owner occupied loans of which 21.2% represented office space. Our top 25 non-owner occupied commercial real estate loans averaged approximately $31 million per exposure although the office space was primarily made up of mid-sized offices located outside of metropolitan business districts with 39% of the office portfolio averaging less than $5 million per exposure.

Non-Performing Assets

Following is a summary of non-performing assets:

TABLE 13

(in millions)

Non-performing assets decreased $2.5 million, from $110.0 million at December 31, 2023 to $107.5 million at March 31, 2024 and remain at or near historically low levels.

Allowance for Credit Losses on Loans and Leases

The CECL model takes into consideration the expected credit losses over the life of the loan at the time the loan is originated. 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 March 31, 2024 and December 31, 2023, we utilized a third-party consensus macroeconomic forecast reflecting the current and projected macroeconomic environment. For our ACL calculation at March 31, 2024, the macroeconomic variables that we utilized included, but were not limited to: (i) the purchase only Housing Price Index, which increases 7.4% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which increases 3.6% over our R&S forecast period, (iii) S&P Volatility, which increases 19.6% in 2024 and decreases 3.5% in 2025 and (iv) personal and business bankruptcies, which increase steadily over the R&S forecast period but average below historical through-the-cycle period. Macroeconomic variables that we utilized for our ACL calculation as of December 31, 2023 included, but were not limited to: (i) the purchase only Housing Price Index, which increases 5.3% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which increases 0.1% over our R&S forecast period, (iii) S&P Volatility, which decreases 4.0% in 2024 and 2.9% in 2025 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical through the cycle period.

Following is a summary of certain data related to the ACL and loans and leases:

TABLE 14

(dollars in millions)

The ACL on loans and leases of $406.3 million at March 31, 2024 increased $0.7 million, or 0.2%, from December 31, 2023. Our ending ACL coverage ratio at both March 31, 2024 and December 31, 2023 was 1.25%. Total provision for credit losses for the three months ended March 31, 2024 was $13.9 million, compared to $14.1 million for the same period in 2023. Net charge-offs were $12.8 million for the three months ended March 31, 2024, compared to $13.2 million for the first three months of 2023. The ACL as a percentage of non-performing loans for the total portfolio was stable at 389% as of March 31, 2024, compared to 378% as of December 31, 2023.

Deposits

Our primary source of funds is deposits. Our diversified and granular deposit base are provided by business, consumer and municipal customers who we serve within our footprint.

Following is a summary of deposits:

TABLE 15

(in millions)

Total deposits increased $24.5 million, or 0.1%, from December 31, 2023, even with the seasonal outflows during the current quarter, however we continued to experience balance migration into higher-yielding deposit products. We ended the quarter with approximately 78% of all deposits insured by the FDIC or collateralized.

Capital Resources and Regulatory Matters

Our capital position depends in part on 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.

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.

Since inception of our $300 million stock purchase program, we repurchased 14.1 million shares at a weighted average share price of $11.39 for $160.9 million, with $139.1 million remaining for repurchase. Any 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.

On February 15, 2024, we redeemed all our Series E, 7.25% Fixed Rate / Floating Rate Non-Cumulative Perpetual Preferred Stock in the amount of $111 million. The preferred stock is no longer outstanding and dividends will no longer accrue on such securities.

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. 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 of leverage ratio (as defined). Failure to meet minimum capital requirements could lead to initiation of certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on our Consolidated Financial Statements, dividends and future business and corporate strategies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNB and FNBPA must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. FNB’s and FNBPA’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

At March 31, 2024, 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 bank holding companies (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 March 31, 2024, the total deferred impact on CET1 capital related to our adoption of CECL was approximately $17.2 million, or 5 basis points, which will be eliminated in 2025.

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 customers and communities under stressful financial conditions.

Following are the capital amounts and related ratios for FNB and FNBPA:

TABLE 16

(dollars in millions)

(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 2023 Annual Report on Form 10-K as filed with the SEC on February 26, 2024.

LIQUIDITY

Our primary liquidity management goal 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 appropriate 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.

Parent Company Liquidity

The parent company’s funding requirements primarily consist of shareholder dividends, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, and stock repurchases. The parent company’s funding sources primarily consist of dividends and interest received from the Bank and other direct subsidiaries, net taxes collected from subsidiaries included in the consolidated tax returns, fees for services provided to subsidiaries and the issuance of debt instruments. The dividends received from the Bank and other direct subsidiaries may be impacted by the parent’s or its subsidiaries’ capital and liquidity needs, statutory laws and regulations, corporate policies, contractual restrictions, profitability and other factors. In addition, through one of our subsidiaries, we regularly issue subordinated notes, which are guaranteed by FNB.

Management utilizes various strategies to ensure sufficient cash on hand is available to meet the parent company's funding needs. During the third quarter of 2022, we completed a Senior Debt offering for $347.7 million in net proceeds. A portion of these proceeds was used to retire debt that matured in February 2023 (for additional information, see Note 9, "Borrowings" in the Notes to the Consolidated Financial Statements in this Report). The parent company's cash position at March 31, 2024 was $268.3 million, down $107.1 million from year-end, primarily due to the redemption of all $111 million of our Series E, 7.25% Fixed Rate / Floating Rate Non-Cumulative Perpetual Preferred Stock. The Board of Directors declared the redemption of the preferred stock given its higher relative cost of capital and our strong capital position with the regulatory CET1 ratio and Total Capital ratios at 10.2% and 12.0%, respectively, at March 31, 2024 with the Total Capital ratio reflecting the preferred stock redemption.

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 existing cash on hand. The LCR and MCH ratios and Parent company cash on hand are presented in the following table:

TABLE 17

Management has concluded that our cash levels remain appropriate given the current market environment.

Bank Liquidity

Bank-level 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. The Bank 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 faced with a liquidity crisis.

Over time, our liquidity position has been positively impacted by FNBPA's ability to generate growth in relationship-based accounts. Organic growth in low-cost transaction deposits was complemented by management’s continued strategy of deposit gathering efforts focused on attracting new customer relationships across our geographic footprint and deepening relationships with existing customers, in part through internal lead generation efforts leveraging data analytics capabilities. Consistent with industry trends, we have experienced a shift in deposits from non-interest-bearing deposits into certificates of deposit (CDs). The March 2023 banking disruption caused an acceleration of this shift. At March 31, 2024 approximately 78% of our deposits were insured by the FDIC or collateralized, stable with December 31, 2023. Non-interest-bearing demand deposits decreased $240.4 million, compared to December 31, 2023. Interest-bearing demand deposits decreased $129.8 million and savings account balances decreased $75.4 million, while time deposits increased $470.0 million, compared to December 31, 2023, as customers continue to migrate deposits into higher-yielding deposit products. The mix of non-interest-bearing deposits to total deposits remained stable with the prior quarter at 29%. Our cash balances held at the FRB were $1.1 billion at both March 31, 2024 and December 31, 2023. Management will continue to evaluate appropriate levels of liquidity based on expected loan and deposit growth and other balance sheet activity.

The following table presents certain information relating to FNBPA’s credit availability and salable unpledged securities:

TABLE 18

(dollars in millions)

Our bank-level liquidity position was strong throughout the first quarter of 2024. Our contingency funding policy and periodic liquidity stress testing of multiple stress scenarios is particularly valuable as we successfully manage our liquidity. We continue to have ample unused borrowing capacity that could cover 2.0 times the uninsured deposit and non-collateralized deposit balances as of March 31, 2024. A portion of this capacity includes the FRB's Discount Window. We have no borrowings under this facility. Additional sources of unused wholesale credit availability for FNBPA include the ability to borrow from the FHLB, correspondent bank lines, and access to other channels. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities that could be utilized to meet funding needs and has excess cash to meet its pledging requirements. At March 31, 2024, FNBPA has $2.0 billion of cash and salable unpledged government and agency securities representing 4.4% of total assets. This compares to a policy minimum of 3.0%.

Another metric for measuring liquidity risk is the liquidity gap analysis. The following liquidity gap analysis as of March 31, 2024 compares the difference between our cash flows from existing earning assets and interest-bearing liabilities over future time intervals. Management calculates this ratio at least quarterly and it is reviewed regularly by ALCO. 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 expected to mature over the next 12 months than liabilities. The allocation of non-maturity deposits and customer repurchase agreements to the twelve-month categories is based on the estimated lives of each product.

TABLE 19

(dollars in millions)

The twelve-month cumulative gap to total assets ratio was (5.1)% as of March 31, 2024, compared to (2.6)% as of December 31, 2023. The change in the twelve-month cumulative gap to total assets was primarily related to the active management of deposit pricing across the deposit product maturity tenors which reduced our asset sensitivity. In addition, the ALCO regularly monitors various liquidity ratios, stress scenarios of our liquidity position and assumptions considering market disruptions, lending demand, deposit behavior, and funding availability. 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.

MARKET RISK

Market risk refers to potential losses arising predominately from changes in interest rates, foreign exchange rates, equity prices and commodity prices. Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. 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.

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 activities to calculate net interest income under various hypothetical rate scenarios. The ALCO regularly reviews earnings simulations over multiple years under various interest rate scenarios. Reviewing these various measures provides us with a comprehensive view of our interest rate risk profile, which provides the basis for balance sheet management strategies.

The following repricing gap analysis as of March 31, 2024 compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The allocation of non-maturity deposits and customer repurchase agreements to the one-month maturity category below 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.

Management utilizes the repricing gap analysis as a diagnostic tool in managing net interest income and EVE risk measures.

TABLE 20

(dollars in millions)

The twelve-month cumulative repricing gap to total assets was 6.7% and 10.3% as of March 31, 2024 and December 31, 2023, 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. The change in the cumulative repricing gap at March 31, 2024, compared to December 31, 2023, is primarily related to customers moving into shorter-term time deposits.

In addition to the repricing gap analysis above, we model rate scenarios which move all rates gradually over twelve months (Rate Ramps). We also model rate scenarios which move all rates in an immediate and parallel fashion (Rate Shocks) and model scenarios that gradually change the shape of the yield curve. Using a static Balance Sheet structure and utilizing net interest income simulations, the following table presents an analysis of the potential sensitivity of our net interest income to changes in interest rates using Rate Ramps and the sensitivity of EVE using Rate Shocks. 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 March 31, 2024. The calculated results do not reflect management's potential actions.

TABLE 21

Management continues to be proactive in managing our interest rate risk (IRR) position with the intention to manage to a more neutral position given the current market expectations for future interest rates. During the first quarter of 2024, management adjusted the IRR position by managing cash balances, slightly extending the duration of the investment securities portfolio, originating adjustable rate mortgage loans with longer-duration fixed periods, strategically meeting our customers' preferences for higher yielding deposit products, in particular, with shorter-term time deposits, and utilizing borrowings of variable rates and varying maturities. As a result, the net interest income change over 12 months shown above in both the up and down rate ramp scenarios is closer to neutral compared to December 31, 2023.

We also utilize derivatives to manage the IRR position and we continue to make use of interest rate swaps to commercial borrowers (commercial swaps) to manage our IRR position as the commercial swaps effectively increase our level of adjustable-rate loans. Total variable and adjustable-rate loans were 62.7% of total net loans and leases as of March 31, 2024 and 62.2% as of December 31, 2023. As of March 31, 2024, the commercial swaps totaled $5.6 billion of notional principal, down from $5.7 billion at December 31, 2023. 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. For additional information regarding interest rate swaps, see Note 10, "Derivative Instruments and Hedging Activities" in the Notes to the Consolidated Financial Statements in this Report.

In addition to the rate ramp scenarios for net interest income changes shown above, we also model immediate interest rate shock scenarios. These results use historical long-term deposit rate beta assumptions that are regularly analyzed and adjusted as necessary for both rising and falling rate scenarios. Assuming a static Balance Sheet, a +100 basis point Rate Shock increases net interest income (12 months) by 3.0% at March 31, 2024 and 3.4% at December 31, 2023. For a +200 basis point Rate Shock, net interest income (12 months) increases by 5.8% at March 31, 2024 and 6.7% at December 31, 2023. The corresponding metrics for a minus 100 basis point Rate Shock are (3.1)% and (3.6)% at March 31, 2024 and December 31, 2023, respectively. The drivers of the change in net interest income in the rate shock scenarios include the mix shift of deposit products into shorter-term time deposits, the pace of deposit repricing and assumed betas and loan prepayments. These results reflect a more neutral net interest income change over 12 months in both the up and down rate shock scenarios compared to December 31, 2023, consistent with the rate ramp results.

The FOMC increased the Federal Funds rate 100 basis points in the first seven months of 2023. Forty-eight percent of our net loans and leases reprice within the next three months and are indexed to short-term SOFR, Prime and other indices which benefit from higher rates. Our cash position has also been a significant factor in our asset sensitivity metrics.

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, the competitive landscape and expectations regarding future interest rates, as well as internal factors regarding product offerings, product mix and pricing of loans and deposits.

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 planned growth or management actions that could be taken.

CREDIT RATINGS

Our credit ratings affect the cost and availability of short- and long-term funding and collateral requirements for certain derivative instruments.

Credit ratings are subject to ongoing review by rating agencies, which consider a number of factors, including our financial strength, performance, prospects and operations as well as factors not under our control. Other factors that influence our credit ratings include changes to the rating agencies’ methodologies for our industry or certain security types; the rating agencies’ assessment of the general operating environment for financial services companies; our relative positions in the markets in which we compete; our various risk exposures and risk management policies and activities; pending litigation and other contingencies; our reputation; our liquidity position, diversity of funding sources and funding costs; the current and expected level and volatility of our earnings; our capital position and capital management practices; our corporate governance; current or future regulatory and legislative initiatives; and the agencies’ views on whether the U.S. government would provide meaningful support to us or our subsidiaries in a crisis.

Credit rating downgrades or negative watch warnings could negatively impact our reputation with lenders, investors and other third parties, which could also impair our ability to compete in certain markets or engage in certain transactions. In particular, holders of deposits which exceed FDIC insurance limits may perceive such a downgrade or warning negatively and withdraw all or a portion of such deposits.

The following table presents the credit ratings for FNB and FNBPA as of March 31, 2024:

TABLE 22

RISK MANAGEMENT

As a financial institution, we take on a certain amount of risk in every business decision, transaction and activity. Accordingly, we have designed an Enterprise Risk Management Framework and risk management practices to help manage enterprise risks. Our Board of Directors and senior management have identified seven major categories of risk: credit risk, market risk, liquidity risk, operational risk, legal and compliance risk, reputation 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.

We support our risk management processes and business oversight through the three lines of defense and a governance structure at the Board of Directors and management levels.

The lines of defense model consists of:

• First Line of Defense - consists of our businesses and enterprise support areas that generate risk and are principally responsible for owning and managing the day-to-day risk-taking activities in accordance with the risk frameworks.
• Second Line of Defense - consists of Risk Management and Compliance Departments responsible for developing risk frameworks, overseeing risk-taking activities and identifying, assessing, monitoring and reporting on enterprise aggregate risks.
• Third Line of Defense - is Internal Audit and provides independent assurance on the effectiveness of controls and risk management practices across our first and second lines of defense.

Our Board of Directors is responsible for the oversight of management on behalf of our stockholders. The Board of Directors has assistance in carrying out its duties and may delegate authority through the following standing Board Committees:

• Audit Committee - provides oversight of our internal and external audit processes. In addition, monitors the integrity of the consolidated financial statements, internal controls over financial reporting, qualifications and independence of our audit function.
• Nominating and Corporate Governance Committee - responsible for selecting and recommending nominees for election to the FNB and FNBPA Boards of Directors.
• Compensation Committee - reviews performance and compensation of senior management and reviews and implements compensation and benefit matters having corporate-wide significance.
• Executive Committee - joint session of the FNB and FNBPA Board of Directors to cover special matters, as deemed necessary, in between regularly scheduled board meetings.
• Risk Committee - provides oversight of our risk management and assessment processes, including the review and approval of risk management policies, procedures and practices, to identify, assess, monitor and report material risks.
• Credit Fair Lending and CRA Committee - responsible for providing oversight of credit and lending strategies and objectives.

The Risk Committee serves as the primary point of contact between our Board of Directors and the Risk Management Council (RMC), which is the senior management level committee responsible for identifying, assessing, monitoring and reporting on enterprise-wide risks. The Risk Committee and RMC are supported by other risk management committees, including Credit Risk Committees, Operational Risk Committee, Compliance Risk Committee and ALCO.

Risk appetite is an integral element of our enterprise risk management framework and 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 capacity and appetite constraints from both financial and non-financial risks. The Board of Directors adopted an enterprise risk appetite that defines acceptable risk limits under which we seek to operate in pursuit of optimizing returns. As such, we monitor a series of Key Risk Indicators for various business lines and operation units to measure performance alignment with our stated risk appetite. 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.

Our Enterprise Risk Management Framework provides the practices to identify, assess, control and monitor and report on risk across the organization. Reports relating to our risk appetite and strategic plans, and our ongoing monitoring thereof, and our aggregate risk profile, are regularly presented to our various management level risk oversight and planning committees and periodically reported up through our Board Risk Committee.

The Board of Directors believes that our enterprise-wide risk management process is effective and enables the Board of Directors to:

• assess the quality of the information they receive;
• understand the businesses, investments and financial, accounting, legal, regulatory and strategic considerations, and the risks that FNB faces;
• oversee and assess how senior management evaluates risk; and
• assess appropriately the quality of our enterprise-wide risk management processes.

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 23

Operating net income available to common stockholders

(in thousands)

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, preferred deemed dividend at redemption, FDIC special assessment, loss on indirect auto loan sale and branch consolidation costs are not organic costs to run our operations and facilities. These costs are specific to each individual transaction, and may vary significantly based on the size and complexity of the transaction.

TABLE 24

Operating earnings per diluted common share

TABLE 25

Return on average tangible common equity

(dollars in thousands)

(1) Excludes loan servicing rights.

TABLE 26

Operating return on average tangible common equity

(dollars in thousands)

(1) Excludes loan servicing rights.

TABLE 27

Return on average tangible assets

(dollars in thousands)

(1) Excludes loan servicing rights.

TABLE 28

Tangible book value per common share

(dollars in thousands, except per share data)

(1) Excludes loan servicing rights.

TABLE 29

Tangible common equity to tangible assets

(dollars in thousands)

(1) Excludes loan servicing rights.

79

TABLE 30

Operating non-interest expense

(dollars in thousands)

Key Performance Indicators

TABLE 31

Efficiency ratio

(dollars in thousands)

80

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.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. FNB’s management, with the participation of our principal executive and financial officers, evaluated our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective as of such date at the reasonable assurance level as discussed below to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. FNB’s management, including the CEO and the CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within FNB have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

CHANGES IN INTERNAL CONTROLS. The CEO and the CFO have evaluated the changes to our internal controls over financial reporting that occurred during our fiscal quarter ended March 31, 2024, as required by paragraph (d) of Rules 13a–15 and 15d–15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

For information regarding risk factors that could affect our results of operations, financial condition and liquidity, see the risk factors disclosed in the “Risk Factors” section of our 2023 Annual Report on Form 10-K. There were no material changes in risk factors relevant to our results of operations, financial condition or liquidity since December 31, 2023.