Spring 2018 Financial Services F.N.B. Corporation (NYSE: FNB) · term rates and long-term rates...

Important disclosures appear on the last page of this report.

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Krause Fund Research Spring 2018

Financial Services Recommendation: HOLD Analysts

Nicholas Gray [email protected] Dylan Decker [email protected]

Company Overview F.N.B. Corporation (FNB) headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in eight states. FNB provides a full range of community banking, insurance, consumer finance and wealth management solutions through its subsidiary network which is led by its largest affiliate, First National Bank. The Company has total assets of $31 billion, and more than 400 banking offices throughout Pennsylvania, Ohio, Maryland, West Virginia, North Carolina and South Carolina. Drivers Improvement in customer experience: S&P Global Market Intelligence recognized FNB’s mobile banking as a leader among national and regional competitors. FNB continues to improve its online banking, Smart ATMs, and branch designs. Leader among peers in net interest margin and efficiency ratio: FNB stands out in two key banking metrics that show they have the ability to invest funds effectively and grow revenue faster than expenses. Acquisition of Yadkin Financial Corp increases foothold in attractive high-growth metropolitan areas: In a $1.8 billion deal, FNB adds Charlotte, Raleigh, and the Piedmont Triad to an already strong presence in Pittsburgh, Baltimore, and Cleveland.

Risks Flattening of the yield curve: The spread between short-

term rates and long-term rates continues to compress. If this trend continues, bank profits may shrink.

Unpredictable acquisition strategy: FNB’s appetite for inorganic growth through acquisitions has gone well in the past. However, larger acquisitions in the future may increase the difficulty in managing the risk of acquired loan portfolios.

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F.N.B. Corporation (NYSE: FNB) April 15, 2018

Current Price $13.34 Target Range $15- 16

Stock Performance Highlights 52 week High $15.00 52 week Low $12.02 Beta Value 0.81 Average Daily Volume 2.75 m Share Highlights Market Capitalization $4.3 b Shares Outstanding 323.63 m Book Value per share $13.3 EPS (2017) $0.63 P/E Ratio 21.095 Dividend Yield 3.56% Dividend Payout Ratio 76.19% Company Performance Highlights ROA .75% ROE 5.71% Interest Income $980.33 m Financial Ratios Efficiency Ratio 54.3% Net Interest Margin 3.4% One Year Stock Performance

Investment Thesis


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We recommend a HOLD rating on FNB Corp. (NYSE: FNB) as of April 15th, 2018. After evaluating our equity discounted cash flow and equity economic profit models, we believe they provide an accurate target price of $15.87. We put less of an emphasis on our DDM model for a combination of factors; FNB’s history of zero growth in dividends and the uncertain future of acquisition activity which ultimately can affect dividends paid. We consider our rating to be fairly reasonable based on a combination of macroeconomic factors and industry-specific ratios that show FNB may be a leader among its peers, but in a sector that doesn’t react positively to a flattening yield curve. Strong asset growth rates in FNB’s loan portfolio and the interest income that comes with it may not be enough to offset shrinking interest spreads from a flattening yield curve.

ii Community Banking The community banking segment consists of FNBPA, that offers commercial and consumer banking services. Commerical Banking offers services such as corporate banking, small business banking, investment real estate financing, business credit, capital markets, and lease financing. Consumer banking offers services such as deposit products, mortgage lending, consumer lending and mobile and

online banking services. On March 11, 2017, FNB acquired Yadkin Financial Corporaton (YDKN) a bank holding company based in Raleigh, North Carolina that added a net book value of $6.8 billion of assets, $5.1 billion in loans and $5.2 billion in deposits. The deal was valued at $1.8 billion and added nearly 100 branches. Wealth Management The wealth management segment offers wealth management services to individuals, corporations, and retirement funds, and also existing customers of community banking within FNB’s geographic markets. Wealth management is conducted through three subsidiaries of FNBPA. First National Services Company, LLC (FNIS) provdes a range of personal and corporate fiduciary services, including decedent and trust estates. At the end of 2017 the trust assets under management was approximately $4.9 billion. The second subsidiary is First National Investment Services Company which offers an array of investment products and services for customers through a third-party licensed brokerage firm F.N.B. Investment Advisors, Inc (FNBIA), offering different investment options such as mutual funds, annuities, stocks, and bonds. Insurance The insurance segment operates through First National Insurance Agency, LLC (FNIA), which is a subsidiary of FNB. FNIA is a full service insurance brokerage agency offering numerous lines of commerical and personal insurance through major carriers and individuals primarily within FNB’s geographic markets. The goal of FNIA is to grow revenue by selling to existing customers of community banking and to gain new customers through its own channels.

Executive Summary


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Consumer Finance The consumer finance segment operates through their subsidiary, Regency Finance Company which is responsible for making personal installment loans to individuals and buying installment sales finance contracts from retail merchants. It is funded through the sale at Regency’s branch offices of subordinated notes, operating in Pennsylvania, Ohio, Tennessee and Kentucky.iii

The income breakdown for FNB is shown above. Most of their income comes from commercial banking at almost 86%. The rest of the segments they are involved in have a very small impact on net income, and the other segment that deals with credit card and mezzanine loans (typically consisting of unsecured, high-yielding), actually has a negative impact on net income. Real Gross Domestic Product A well-known metric used to measure how the overall economy is performing, Real GDP represents the value of all goods and services produced in the economy, taking into account inflation. Annually adjusted real GDP growth

in Q3 2017 and Q4 2017 came in at 3.2% and 2.9%.

iv We expect real GDP to remain strong in the range of 2.9-3.1% for the remainder of 2018. The Tax Cuts and Jobs Act (TCJA) should raise GDP figures in the near future through increased consumer spending and business investments. A rise in business investment could benefit banks because companies will likely fund some of their projects by borrowing from banks. Talks of a trade war between the United States and China could also have minor effects on GDP if the tariffs discussed are realized. Tariffs could affect business investment as well as net exports. Interest Rates Multiple interest rates have a significant impact on financial institutions, particularly banks. Bank profitability is primarily determined by the yield curve, specifically the spread between short-term and long-term yields. Low interest rates like we’ve seen the past several years encourage borrowing among consumers as the cost to borrow is relatively inexpensive based on historical figures.

Fed Funds Rate

The federal funds rate is determined by the Federal Reserve Open Market Committee (FOMC) and is manipulated in an effort to control growth within the economy. The fed funds rate currently sits at 1.75%. Short-term treasury yields often move when the fed funds rate is raised and lowered. Banks use this as

Macroeconomic Outlook


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the basis for determining interest rates offered on deposits. The FOMC plans to continue raising rates due to a strengthening economy and rising inflation levels. We expect more rate hikes in 2018 with the rate passing 2% in 2018 and reaching 3% by 2020.

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Long-Term Treasury Yields The long-term of the yield curve, made up of the 10-year T-Note and the 30-year T-Bond, affects the interest rates banks charge on loans. Currently, the 10-year note sits at 2.82% while the 30-year bond is at 3.03%. Banks utilize these bond yields along with other rates to determine what they charge customers on everything from residential mortgage loans to commercial and industrial loans. The yield curve has been flattening as of late. With the FOMC electing to raise the fed funds rate, short-term yields have risen while long-term yields have remained steady. This negatively impacts banks because they borrow on the short end and loan out on the long end.

Housing Starts The housing starts report is an indicator of how many new home constructions are started. This report is released monthly. The housing starts data not only provide information about the current housing market but also can indicate future economic activity. Along with construction of the home comes spending on appliances, home furnishings, landscaping, and increase borrowing activity through mortgage loans. With a larger supply of borrowers, banks have the ability to make more loans and have better flexibility in structuring their loan portfolio. Housing starts for January and February came in at 1.329m and 1.236 million. vi

vii February housing starts fell due to a large decline in multi-family construction. With 10-year note yields at the lower end of historical parameters, we should expect demand for mortgages to remain steady if not increase due to slowly rising rates on the long end of the yield curve. Mortgage rates are based on both the prime rate and 10-year T-Note + a 160 to 180 bps premium. The prime rate is the lending rate banks offer to customers with the highest credit quality. Typically, mortgage rates are 300 bps higher than the Fed Funds Rate. Housing starts are expected to display a modest gain at 1.269 million annualized.


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Inflation The Consumer Price Index (CPI) is the most widely used indicator of inflation. Based on inflation reports, the FOMC will decide whether or not to raise the fed funds rate. Although the committee uses the Personal Consumption Expenditures Price Index (PCE) for their inflation target of 2%, they still look at CPI. CPI measures a fixed basket of goods and services while the basket for PCE is updated annually. Changes in inflation rates can also affect bond yields. The CPI for February and March was measured at 2.2% and 2.4%.

The rising inflation environment can be partially credited to increasing wages. With bigger paychecks, comes more household income. This leads to increased spending. When too much money is chasing too few goods, prices rise. As expectations of inflation change, the Fed will look to adjust the Fed Funds Rate which will ultimately affect the interest rates banks pay on deposits and charge on loans. Capital Market Outlook We believe the TCJA will have a significant impact on corporate investment levels. Prior to the U.S. election, companies kept large amounts of cash on hand or passed it on to shareholders. With the tax cuts, we expect companies to increase their capital expenditures. IT will be a popular area for investment among companies looking to upgrade their security and data capabilities. An increased

level of infrastructure spending looks to play a role as well. Sectors that should benefit most from this surge in capex seem to be industrials and software.viii We also predict a continuation in the trend of technology companies outperforming the overall market. Technology is being implemented into every aspect of consumers’ lives. Businesses also rely on technology for productivity improvements. Blockchain, the internet of things, AI, and cloud computing are just a few areas of expansion that tech is providing to the rest of the market.

ix Regional banks are smaller financial companies that primarily operate in one geographical region of the country. They are larger than community banks but smaller than large money center banks. Regional banks can be distinguished from larger banks not only by total assets, but also by regulatory standards, capital requirements, and the services they offer. Some of the larger banks have investment banking arms that assist companies with IPOs and M&A activities. Real estate, commercial, and industrial loans generate the majority of revenue while depository services that bring in revenue through fees and charges generate roughly 33% of revenues.

Industry Analysis


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The regional banking industry as a whole has external factors that affect their sales and profitability. Technology The evolution of technology is changing the banking industry drastically. Most banks use elements of cloud computing, which reduce the costs of implementing online and mobile banking capabilities that customers nowadays expect from their bank. Many regional banks are also starting to implement big data and analytics along with robotic process automation to further strengthen control and reduce costs. With new advanced technology, regional banks are more able to serve their customers by providing insight from a risk management and customer service perspective, increasing their speed to market, and strengthening operations and controls. If a bank is late to adopt new technologies, it could put them at a disadvantage compared to their competitors with regards to speed, efficiency and customer service. x Government Regulatory Environment Since the financial crisis of 2008 the banking sector has become highly regulated. The earnings for regional banks took a big hit just like the rest of the market. During the aftermath, the implementation of new regulations aimed to protect the government, financial institutions, and the public. With these new regulations in place, it took time for banks to recover from the damage inflicted by the financial crisis.

The recent increase in the Fed Funds Rate to 1.75% from 1.5% increases the overnight rates that regional banks can borrow money from other banks. With this, short-term yields begin to rise, possibly flattening the yield curve. As borrowing and lending rates are starting to come closer together, profit margins for banks are going to decrease and net income growth is going to slow down. A recent development in the banking industry has been the Senate’s decision to roll back Dodd-Frank financial regulations. As of now, banks with assets of $50 billion and above face stringent stress tests pertaining to mortgage lending, trading, and other regulatory exams. If the legislation passes through Congress and makes its way to the President, this $50 billion threshold will increase massively to $250 billion, cutting the list of banks above the threshold from 38 to 12.xi

With assets currently at $31 billion, FNB wouldn’t directly benefit from this regulatory change but it could affect how they think about growing in the future. FNB may feel more comfortable making larger acquisitions than they have in the past. Capital Requirements Regulatory agencies set capital requirements to ensure that banks have adequate capital to overcome operating losses while still providing access to withdrawals. These requirements are also used to ensure that banks aren’t holding risky investments that increase the chance of default.xii As of the year ending 2017, bank holding companies are required to maintain common equity tier 1


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(CET1), tier 1, and total capital (sum of tier 1 & 2) levels of 5.75%, 7.25%, and 9.25%, respectively. Under these requirements, FNB’s capital ratios come in at 8.9%, 9.3%, and 11.4%. As a percentage of assets, total stockholder’s equity for FNB is trending down in our forecast towards a range of 10-11%, which is near the middle of regulatory targets of 8-14%. xiii Peer Comparison Bank Ratios Throughout our forecast, we compared FNB to a peer group of regional banks based primarily on their market cap. We used key measurements of banks such as net interest margin and efficiency ratio for comparisons. Average net interest margin for all US banks was 3.17% in Q4 of 2017.

Net interest margin is calculated using the following formula: (Interest Income – Interest Expense) / Average Interest Earning Assets. A higher percentage reflects efficient investing of funds. FNB’s net interest margin of 3.4% is significantly higher than the average among all US banks as well as its peer group. This may be due to a higher spread between borrowing and lending rates.

Another key financial measure is the efficiency ratio which measures a bank’s ability to turn non-interest expenses into revenue. It is believed that a ratio near 50% is optimal. With an efficiency ratio of 54.3%, FNB is a leader among its peers. If FNB is able to continue lowering this ratio, it shows that they are able to keep expenses in check while growing revenue. Corporate Strategy FNB’s strategy focuses on providing quality consumer and commercial-based financial services adapted to the needs of each of the markets they serve. They seek to maintain their community presence by providing local management with a certain level of freedom with their decision making. However, they also have defined operations that are centralized in order to maintain consistency between the different communities. Life Cycle FNB is currently in a growing state of the life cycle. They are continually increasing their number of branches primarily through the acquisition of other companies. They currently gain market share through both organic and inorganic growth. Financial Summary FNB has four components to their revenue, the most important being interest income which comes from the interest they earn by loaning out money. If this component’s growth slows down or even declines, the bank will face a multitude of problems because they wouldn’t be able to pay off their deposit interest expenses and non-interest expenses.

$0.87$0.79

$0.63

$0.85$0.93

$1.00$1.07

$1.19

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)

EPS

Company Analysis


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During the last few historical periods, the earnings per share has seen a decline with the largest drop occurring in 2017, most likely caused by the acquisition of Yadkin. We see this reversing in the future. We expect future interest income growth to outpace interest expense due to an ever-increasing market share. xiv FNB has had a return on equity (ROE) that followed the industry throughout the past few years except for 2017. This was caused by the acquisition of Yadkin Financial Corporation in which their stockholders equity nearly doubled while their net income continued to grow at a steady rate. In the coming years, our forecast shows FNB’s net income catching up to this gain in stockholder’s equity. Our model forecasts ROE growing from 6.25% in 2018 to 7.56% in our CV period. Product and Service Trends:

Clicks-to-Bricks Campaign This campaign is aimed at improving their relationship with customers by enhancing the products and services they offer within branches, at ATMs, and via the internet. An online payment system known as Zelle allows customers to send and receive money from others almost instantly. Participating banks believe this system is superior to competitors like Venmo and Cash by Square because of the nearly immediate availability of funds. FNB is also implementing Smart ATMs and ITMs which provide customers with the ability to deposit funds and speak to teller via a live feed. xv

Revenue Decomposition FNB’s revenue can be broken down into the four primary business segments previously discussed in our executive summary along with another category consisting of credit card and mezzanine loans. We expect FNB’s net interest income to continue growing at a steady rate throughout the forecast period, although at a much lower rate than their historical period. The majority of FNB’s interest income can be attributed to the community banking segment which makes up 97% of all interest income. Historical growth in net interest income has been inflated recently due to a number of acquisitions, Yadkin Financial Corp being the largest in March of 2017. FNB earns most of its interest income from loans and leases with a small portion coming from gains on securities held. The wealth management segment had a miniscule impact on net interest income in the first few years of the historical period. Since 2013, this segment has produced no interest income and our forecast projects none in the future. FNB’s insurance segment has seen a decline in net interest income throughout the entirety of the historical period so we predict this trend to continue at a slow rate. The consumer financing segment generates the second most interest income with a little more than 5% of overall income. Community banking also makes up nearly 99% of all assets. Due to rate hikes from the FOMC, the cost of borrowing for banks is rising, while lending rates earned on loans are rising at a slower pace, causing the net interest spread to shrink. After the acquisition of Yadkin Financial, FNB’s revenue should see a boost in revenue in the next several years. Cost of Equity Our cost of equity calculation was derived from our risk-free rate of 2.97%, implied equity risk

Valuation Analysis


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premium of 4.80%, and beta of .81. Our risk-free rate was the current yield on a 30-year U.S. Treasury bond. The implied equity risk premium of 4.80% was found on Aswath Damodaran’s website using the trailing 12-month cash yield.xvi Discounted Cash Flow (DCF) & Economic Profit (EP) Models Using the DCF and EP valuation models. We came to a per share value of $15.87, with the CV value accounting for 89.5% of the total. Our DCF model forecasted FCFE for years 2018-2021 and the continuing value in 2022 came out to amount of $5,989 million. After discounting these values, we were able to get an intrinsic value of $15.72. The EP model forecasted the Equity Economic Profit (EEP) and came out with a continuing value of $916.51. The DCF and EP models return the same target and intrinsic value price. We adjusted the intrinsic values of each model to the current date of 4/15/2018. Dividend Discount Model (DDM)

The DDM model uses our estimated dividends per share and discounts them to the current year. For the CV year we take the P/E multiple multiplied by (1+cost of equity), and then discount that back to the current year. We then add those discounted dividends and stock price together to get the intrinsic value of $10.85. We then adjust for the elapsed fraction of our fiscal year to get an adjusted stock price of $11.06. We don’t feel that the Dividend Discount Model is a good measure of valuation for FNB, because the model relies on dividend growth, and FNB has not grown their dividends paid throughout the historical

period and we do not expect them to during the forecasted period. Relative P/E Model The relative P/E model is used to compare FNB’s peer competitors within the regional banking industry. We chose the peer companies based on how similar their market caps were to FNBs. The average P/E ratio for 2018 from the peers we chose was 15.5, which was slightly lower than what was projected for FNB. This model doesn’t take into account future growth assumptions and only takes recent earnings into consideration. We are predicting strong revenue growth for FNB over the forecast period, due to organic growth and the recent acquisition of Yadkin Financial. For these reasons, we did not take the relative P/E model into consideration for our final valuation. Cost of Equity vs. Inflation Rate We chose these factors because the cost of equity is used directly in the calculation of the target price in our DCF and EP models. A .5% change in cost of equity causes approximately a $1.7 change up or down. The inflation rate is used to calculate non-interest expense items as well as PPE growth. An inflation rate change of .5% increases or decreases about the price about $.90.

Risk-free Rate vs. Commercial Real Estate Loan Growth % Risk-free rate is used in the calculation of the cost of equity, and like mentioned above that is used to calculate the DCF and EP models. Commercial real estate loans are the largest account of loans

Net Interest Income Growth

2010‐2017 2018‐2022

Overall 15.94% 4.29% Community Banking 16.70% 4.07% Wealth Management ‐22.38% 0% Insurance ‐13.44% ‐2.00% Consumer Finance 3.91% 8.49% Other ‐8.13% ‐2.75%

Sensitivity Analysis


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receivable which contributes to the amount of interest income that will be received. A 1% increase in the Commercial real estate growth percentage changes the price from $15.87 to 16.63, and a .1% increase or decrease in risk-free rate changes the price approximately $.43.

Risk Premium vs. Deposit Interest Growth % The risk premium is another factor that contributes to the calculation of the cost of equity and is used to calculate DCF and EP models. The deposit interest growth % is the rate at which interest-bearing deposits are going to grow through the forecast before the CV period and is also the largest deposit liability account. An increase or decrease by .1% in the risk premium changes the price from $16.22 and $15.53 respectively from a price of $15.87. An increase of 1% in deposit interest growth % changes the price from $15.87 to $15.59.

Tax Rate vs. Interest on Loans The tax rate is the rate at which FNB pays their income taxes on net income. Interest on Loans is the percentage of total loans that make up interest income, which makes up the largest income source. An increase in the tax rate will negatively affect the stock price, at a rate of about $.28 every 1% increase. A .5% increase in the interest on loans decreases the price by about $.68.

Beta vs. Interest Rate on Deposits The beta is the final component in computing the cost of equity, and is a measure of the volatility of a security. The interest rate on deposits is the percentage of total interest bearing demand deposits that make up the interest expense on deposits. An increase of .5 in the beta will decrease the price by approximately $1. Increasing the interest rate on deposits by .05% will change the price from $15.87 to $15.92.


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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.


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1 Nasdaq- https://www.nasdaq.com/symbol/fnb/interactive-chart ii FNB 2017 10-K iii FNB 2017 10-K iv : :https://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm v https://fred.stlouisfed.org/series/FEDFUNDS#0 vi Bloomberg vii https://fred.stlouisfed.org/series/HOUST#0 viii https://www.credit-suisse.com/microsites/private-banking/investment-outlook/en/financial-markets/investment-themes.html

ixhttps://www.blackrock.com/investing/literature/whitepaper/bii-global-investment-outlook-q2-2018-us.pdf x Ernst & Young- http://www.ey.com/Publication/vwLUAssets/ey-the-digital-bank-tech-innovations-driving-change-at-us-banks/$File/ey-the-digital-bank-tech-innovations-driving-change-at-us-banks.pdf xi https://www.wsj.com/articles/the-fine-print-whats-in-the-senate-financial-regulation-bill-1520354942 xii Investopedia- https://www.investopedia.com/ask/answers/032315/what-are-key-government-regulations-affect-investing-banking-sector.asp xiii FNB 2017 10-K xiv FACTSET xv February 2018 Investor Presentation xvi http://pages.stern.nyu.edu/~adamodar/

F.N.B. CorpRevenue Decomposition

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Scale Milllions Milllions Milllions Milllions Milllions Milllions Milllions Milllions

Assets Forecast 17557.66 21844.82 31417.64 35040.55 39192.14 43949.51 49402.91 51069.63

Community Banking 98.90% 17349.46 21629.37 31155.97 34655.11 38761.03 43466.06 48859.47 50507.86

Wealth Management 0.10% 20.57 19.62 24.22 33.29 37.23 41.75 46.93 48.52

Insurance 0.10% 22.21 22.05 21.06 33.29 37.23 41.75 46.93 48.52

Consumer Finance 0.80% 195.05 193.35 181.26 280.32 313.54 351.60 395.22 408.56

Other 0.11% ‐29.81 ‐19.58 35.12 38.54 43.11 48.34 54.34 56.18

Net Interest Income Forecast 498.22 611.51 846.43 843.81 893.93 945.14 998.60 1042.84

Community Banking 96.50% 468.36 584.71 825.71 814.27 862.64 912.06 963.65 1006.34

Wealth Management 0.00% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Insurance 0.01% 0.09 0.08 0.08 0.08 0.08 0.08 0.07 0.07

Consumer Finance 5.22% 36.35 37.16 36.51 44.05 46.67 49.35 52.15 54.47

Other ‐1.73% ‐6.58 ‐10.45 ‐15.87 ‐14.60 ‐15.46 ‐16.35 ‐17.28 ‐18.04

Net Non‐Interest Income Forecast ‐228.14 ‐309.37 ‐429.09 ‐454.97 ‐469.88 ‐485.71 ‐502.52 ‐530.64

Community Banking 96.07% ‐214.08 ‐298.15 ‐416.35 ‐437.09 ‐451.41 ‐466.63 ‐482.77 ‐509.79

Wealth Management ‐2.48% 7.71 7.82 8.44 11.28 11.65 12.05 12.46 13.16

Insurance ‐0.11% ‐1.33 1.36 0.95 0.50 0.52 0.53 0.55 0.58

Consumer Finance 5.60% ‐17.26 ‐18.66 ‐18.25 ‐25.48 ‐26.31 ‐27.20 ‐28.14 ‐29.72

Other 0.92% ‐3.18 ‐1.75 ‐3.89 ‐4.19 ‐4.32 ‐4.47 ‐4.62 ‐4.88

Net Interest Income/ Assets 2.84% 2.80% 2.69% 2.41% 2.28% 2.15% 2.02% 2.04%

Community Banking 2.70% 2.70% 2.65% 2.35% 2.23% 2.10% 1.97% 1.99%

Wealth Management 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Insurance 0.40% 0.38% 0.38% 0.24% 0.21% 0.18% 0.16% 0.15%

Consumer Finance 18.64% 19.22% 20.14% 15.71% 14.89% 14.04% 13.20% 13.33%

Other 22.06% 53.37% ‐45.18% ‐37.87% ‐35.87% ‐33.82% ‐31.79% ‐32.12%

F.N.B. CorpIncome Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EScale Millions Millions Millions Millions Millions Millions Millions MillionsInterest IncomeInterest income on loans & leases, including fees 482.09 597.62 861.87 867.44 923.60 983.52 1047.47 1020.50Interest income on securities 64.59 80.90 117.56 121.55 132.77 143.69 155.54 252.59Other interest income 0.12 0.44 0.90 0.20 0.21 0.21 0.22 0.55

Total interest income 546.80 678.96 980.33 989.20 1056.58 1127.42 1203.23 1273.64Interest ExpenseInterest expense on deposits 31.21 41.24 71.58 97.08 111.64 128.38 147.64 173.80Interest expense on short-term borrowings 7.08 12.18 43.97 27.81 30.03 32.44 35.03 42.04Interest expense on long-term borrowings 10.29 14.03 18.34 20.51 20.98 21.46 21.95 14.97Interest expense on junior subordinated debt 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total interest expense 48.57 67.45 133.89 145.39 162.65 182.28 204.62 230.80Net interest income 498.22 611.51 846.43 843.81 893.93 945.14 998.60 1042.84

Provision for loan losses 40.44 55.75 61.07 29.85 34.94 40.91 47.89 16.65Net interest income after provision for loan losses 457.78 555.76 785.36 813.96 858.99 904.24 950.71 1026.19

Non-Interest IncomeNet impairment losses on securities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Service charges 69.88 97.52 124.31 134.25 145.00 156.59 169.12 177.58Trust services 20.93 21.17 23.12 24.97 26.97 29.13 31.46 33.03Commissions & fees 29.91 31.80 34.35 37.10 40.06 43.27 46.73 49.07Capital Markets Income 10.25 15.47 16.60 17.93 19.37 20.91 22.59 23.72Mortgage banking operations 8.62 12.11 19.98 21.58 23.30 25.17 27.18 28.54Bank owned life insurance income 8.14 10.25 11.69 12.63 13.64 14.73 15.91 16.70Net securities gains (losses) 0.82 0.71 5.92 6.39 6.90 7.45 8.05 8.45Other non-interest income 13.87 12.73 16.48 17.80 19.22 20.76 22.42 23.54

Total non-interest income 162.41 201.76 252.45 272.64 294.46 318.01 343.45 360.63Non-Interest ExpenseSalaries & employee benefits expense 202.07 239.80 326.89 350.14 375.05 401.72 430.29 460.90Net occupancy expense 33.67 40.09 53.79 57.61 61.71 66.10 70.80 75.84Equipment expense 31.87 38.05 49.36 64.21 67.69 71.66 76.18 81.27Amortization of intangibles 8.31 11.21 17.52 17.95 18.40 18.86 19.34 19.82Outside services 34.70 43.74 56.11 56.11 56.11 56.11 56.11 56.11FDIC insurance 12.89 19.20 32.90 32.98 33.07 33.15 33.23 33.32Supplies 8.06 10.83 8.33 8.53 8.75 8.97 9.19 9.42Telephone 6.23 7.16 10.22 10.47 10.74 11.00 11.28 11.56Advertising & promotional expense 8.40 10.14 11.51 11.79 12.09 12.39 12.70 13.02Other real estate owned 4.64 5.15 4.44 4.55 4.66 4.78 4.90 5.02Merger & acquisitions related 3.03 37.44 56.51 57.93 59.37 60.86 62.38 63.94State taxes 8.14 8.94 10.26 10.51 10.78 11.04 11.32 11.60Other non-interest expenses 28.55 39.39 43.71 44.80 45.92 47.07 48.25 49.46

Total non-interest expense 390.55 511.13 681.54 727.61 764.34 803.73 845.97 891.27Income before income taxes 229.64 246.39 356.27 358.99 389.11 418.52 448.20 495.55

Income taxes 69.99 75.50 157.07 75.39 81.71 87.89 94.12 104.07Net Income 159.65 170.89 199.20 283.60 307.40 330.63 354.07 391.49

Preferred stock dividends 8.04 8.04 8.04 8.04 8.04 8.04 8.04 8.04Net Income available to common stockholders 151.61 162.85 191.16 275.56 299.35 322.59 346.03 383.45Shares Outstanding 175.44 211.06 323.47 323.47 323.47 323.47 323.47 323.47

Net Income per Common ShareNet income per share - basic 0.87 0.79 0.63 0.85 0.93 1.00 1.07 1.19Weighted Shares Outstanding 174.97 206.24 302.20 302.20 302.20 302.20 302.20 302.20Cash dividends paid for common share 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48

Other DataNumber of Offices 288.00 324.00 417.00 435.77 455.37 475.87 497.28 519.66Number of Employees 2747.00 3326.00 4215.00 4404.68 4602.89 4810.02 5026.47 5252.66Average Number of Employees per Office 9.54 10.27 10.11 10.11 10.11 10.11 10.11 10.11

F.N.B. Corp

Balance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)

Scale Millions Millions Millions Millions Millions Millions Millions MillionsAssetsCash & due from banks 207.40 303.53 408.72 2047.88 4140.38 6696.55 9796.89 10313.38Interest bearing deposits with banks 281.72 67.88 70.73 146.45 167.31 191.35 219.08 225.65

Cash & cash equivalents 489.12 371.41 479.44 2194.33 4307.69 6887.90 10015.96 10539.03Securities available for sale 1630.57 2231.99 2764.56 2958.08 3165.15 3386.71 3623.78 3732.49Securities held to maturity 1637.06 2337.34 3242.27 3534.07 3852.14 4198.83 4576.73 4714.03Residential mortgage loans held for sale 4.78 11.91 92.89 101.25 110.36 120.30 131.12 135.06Loans, net of unearned income 12190.44 14896.94 20998.77 22338.92 23765.79 25285.08 26902.84 27709.92Allowance for credit losses -142.01 -158.06 -175.38 -205.23 -240.17 -281.08 -328.97 -345.61

Net loans & leases 12048.43 14738.88 20823.39 22133.69 23525.62 25004.00 26573.87 27364.31Premises & equipment, gross 306.85 406.75 519.82 556.79 596.39 638.81 684.25 732.91Less: accumulated depreciation 147.77 162.79 183.28 202.04 220.80 239.56 258.32 277.08Premises & equipment, net 159.08 243.96 336.54 354.75 375.59 399.25 425.93 455.83Goodwill 833.09 1032.13 2249.19 2249.19 2249.19 2249.19 2249.19 2249.19Core deposit & other intangible assets, net 45.64 67.33 92.08 94.84 97.68 100.61 103.63 104.67Bank owned life insurance 308.19 330.15 526.82 553.16 580.82 609.86 640.35 659.56Other assets 401.70 479.73 810.46 867.20 927.90 992.85 1062.35 1115.47

Total assets 17557.66 21844.82 31417.64 35040.55 39192.14 43949.51 49402.91 51069.63

LiabilitiesNon-interest bearing demand deposits 3059.95 4205.34 5720.03 6749.64 7964.57 9398.19 11089.87 11422.56Savings, NOW and Interest bearing demand deposi 7098.05 9283.82 12059.22 13868.10 15948.31 18340.56 21091.64 21724.39Certificates & other time deposits 2465.47 2576.50 4620.48 4943.91 5289.99 5660.29 6056.51 6238.20

Total deposits 12623.46 16065.65 22399.73 25561.65 29202.87 33399.04 38238.02 39385.16Short-term borrowings, net 2048.90 2503.01 3678.34 3972.60 4290.41 4633.65 5004.34 5254.55Long-term debt 641.48 539.49 668.17 683.52 699.21 715.27 731.69 748.49Other liabilities 147.64 165.05 262.21 283.18 305.84 330.30 356.73 371.00

Total liabilities 15461.48 19273.20 27008.44 30500.95 34498.33 39078.25 44330.77 45759.20

Stockholders' EquityPreferred stock 106.88 106.88 106.88 106.88 106.88 106.88 106.88 106.88Common Stock & APIC 1809.98 2236.50 4036.82 4036.82 4036.82 4036.82 4036.82 4036.82Retained earnings (accumulated deficit) 243.22 304.40 367.66 498.16 652.46 830.00 1030.98 1269.38Accumulated other comprehensive income (loss) -51.13 -61.37 -83.05 -83.05 -83.05 -83.05 -83.05 -83.05Treasury stock, at cost -12.76 -14.78 -19.11 -19.21 -19.31 -19.40 -19.50 -19.60

Total stockholders' equity 2096.18 2571.62 4409.19 4539.60 4693.81 4871.25 5072.14 5310.43Total liabilities and Stockholders' Equity 17557.66 21844.82 31417.64 35040.55 39192.14 43949.51 49402.91 51069.63

F.N.B. Corp

Cash Flow Statement

Fiscal Years Ending Dec. 31 2015 2016 2017

Scale Millions Millions MillionsOperating Activities Net income 159.65 170.89 199.20Depreciation, amortization & accretion 43.95 60.50 88.80Provision for credit losses 40.44 55.75 61.07Deferred income taxes 0.55 15.25 128.98Net securities losses (gains) -0.82 -0.71 -5.92Tax expense (benefit) of stock-based compensation -0.03 -1.81 -0.82Loans Originated for Sale -445.56 -713.09 -1097.87Loans Sold 455.62 716.71 1046.76Loss (gain) on loans -8.67 -10.75 -17.22Interest receivable -4.69 -5.21 -18.14Interest payable 0.76 -0.15 1.98Securities classified as trading in business combination & sold 0.00 0.00 0.00Bank owned life insurance -6.40 -5.37 -11.20Other operating activities, net -11.33 10.70 -96.72Net cash flows from operating activities 223.48 292.71 278.91Investing ActivitiesNet decreasee (increase) in loans & leases -986.00 -816.09 -1100.48Purchases of securities available for sale -421.90 -1066.36 -1141.62Sales of securities available for sale 33.50 615.20 786.76Maturities of securities available for sale 284.48 543.92 569.95Purchases of securities held to maturity -465.60 -1063.27 -1185.86Sales of securities held to maturity 0.00 0.00 57.05Maturities of securities held to maturity 277.97 357.11 394.82Purchase of bank owned life insurance -72.69 -16.59 -50.12Withdrawal/surrender of bank owned life insurance 72.66 0.00 0.00Increase in premises & equipment -9.72 -59.33 -56.87Net cash received (paid) for mergers & acquisitions 144.63 245.76 196.96Net cash flows from investing activities -1142.67 -1259.65 -1529.41Financing ActivitiesDemand (non-interest bearing & interest bearing) & savings accounts 1259.77 933.79 405.78Net change in time deposits -166.28 -119.73 757.02Net change in short-term borrowings 7.24 251.71 379.14Proceeds from issuance of long-term borrowings 134.95 46.36 155.40Repayment of long-term borrowings -34.97 -173.48 -199.32Decrease in junior subordinated debt 0.00 0.00 0.00Net proceeds from issuance of preferred stock 0.00 0.00 0.00Net proceeds from issuance of common stock 12.73 18.47 11.18Tax (expense) benefit of stock-based compensation 0.03 1.81 0.00Cash dividends paid - preferred -8.04 -8.04 -8.04Cash dividends paid - common -84.51 -101.67 -142.62Net cash flows from financing activities 1120.91 849.23 1358.54Net increase (decrease) in cash & cash equivalets 201.73 -117.71 108.04Cash & due from banks at beginning of year 287.39 489.12 371.41Cash & due from banks at end of year 489.12 371.41 479.44

F.N.B. Corp

Cash Flow Statement ForecastValues in Millions

Fiscal Years Ending December 31 2018E 2019E 2020E 2021E CV (2022)

Net Income 283.60 307.40 330.63 354.07 391.49Add: Depreciation 18.76 18.76 18.76 18.76 18.76Change in allowance for loan losses 29.85 34.94 40.91 47.89 16.65Cash from Operating Activities 332.21 361.10 390.30 420.72 426.89

Change in Interest-Bearing Deposits from Banks -75.72 -20.86 -24.04 -27.72 -6.57Change in Securities available for sale -193.52 -207.07 -221.56 -237.07 -108.71Change in Securities held to maturity -291.80 -318.07 -346.69 -377.89 -137.30Change in Residential mortgage loans held for sale -8.36 -9.11 -9.93 -10.83 -3.93Change in Loans, net of unearned income -1340.15 -1426.88 -1519.29 -1617.76 -807.09Change in Core deposit & other intangible assets, net -2.76 -2.85 -2.93 -3.02 -1.04Change in Bank owned life insurance -26.34 -27.66 -29.04 -30.49 -19.21Capital Expenditures for PPE -36.97 -39.60 -42.42 -45.44 -48.67Change in Other assets -56.73 -60.70 -64.95 -69.50 -53.12Cash from Investing Activities -2032.36 -2112.79 -2260.86 -2419.72 -1185.64

Change in Non-interest bearing demand deposits 1029.61 1214.93 1433.62 1691.67 332.70Change in Savings, NOW and Interest bearing demand deposits 1808.88 2080.21 2392.25 2751.08 632.75Change in Certificates & other time deposits 323.43 346.07 370.30 396.22 181.70Change in Short-term borrowings, net 294.27 317.81 343.23 370.69 250.22Change in Long-term debt 15.34 15.69 16.06 16.42 16.80Change in Other liabilities 20.98 22.65 24.47 26.42 14.27Change in Preferred stock 0.00 0.00 0.00 0.00 0.00Change in Common Stock & APIC 0.00 0.00 0.00 0.00 0.00Payment of Dividends on Common Stock -145.05 -145.05 -145.05 -145.05 -145.05Payment of Dividends on Preferred Stock -8.04 -8.04 -8.04 -8.04 -8.04Change in Accumulated other comprehensive income (loss) 0.00 0.00 0.00 0.00 0.00Change in Treasury stock, at cost -0.10 -0.10 -0.10 -0.10 -0.10Cash from Financing Activities 3339.32 3844.19 4426.73 5099.33 1275.24

Change in Cash 1639.16 2092.50 2556.18 3100.34 516.49Add: Cash at Beginning of the Year 408.72 2047.88 4140.38 6696.55 9796.89Cash at End of the Year 2047.88 4140.38 6696.55 9796.89 10313.38

F.N.B. Corp

Common Size Income Statement (% Assets)


Interest IncomeInterest income on loans & leases, including fees 2.75% 2.74% 2.74% 2.48% 2.36% 2.24% 2.12% 2.00%

Interest income on securities 0.37% 0.37% 0.37% 0.35% 0.34% 0.33% 0.31% 0.49%

Other interest income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total interest income 3.11% 3.11% 3.12% 2.82% 2.70% 2.57% 2.44% 2.49%

Interest ExpenseInterest expense on deposits 0.18% 0.19% 0.23% 0.28% 0.28% 0.29% 0.30% 0.34%

Interest expense on short-term borrowings 0.04% 0.06% 0.14% 0.08% 0.08% 0.07% 0.07% 0.08%

Interest expense on long-term borrowings 0.06% 0.06% 0.06% 0.06% 0.05% 0.05% 0.04% 0.03%

Interest expense on junior subordinated debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total interest expense 0.28% 0.31% 0.43% 0.41% 0.42% 0.41% 0.41% 0.45%

Net interest income 2.84% 2.80% 2.69% 2.41% 2.28% 2.15% 2.02% 2.04%

Provision for loan losses 0.23% 0.26% 0.19% 0.09% 0.09% 0.09% 0.10% 0.03%

Net interest income after provision for loan losses 2.61% 2.54% 2.50% 2.32% 2.19% 2.06% 1.92% 2.01%

Non-Interest IncomeNet impairment losses on securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Service charges 0.40% 0.45% 0.40% 0.38% 0.37% 0.36% 0.34% 0.35%

Trust services 0.12% 0.10% 0.07% 0.07% 0.07% 0.07% 0.06% 0.06%

Commissions & fees 0.17% 0.15% 0.11% 0.11% 0.10% 0.10% 0.09% 0.10%

Capital Markets income 0.06% 0.09% 0.09% 0.10% 0.11% 0.12% 0.13% 0.14%

Mortgage banking operations 0.05% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%

Bank owned life insurance income 0.05% 0.05% 0.04% 0.04% 0.03% 0.03% 0.03% 0.03%

Net securities gains (losses) 0.00% 0.00% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%

Other non-interest income 0.08% 0.06% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05%

Total non-interest income 0.93% 0.92% 0.80% 0.78% 0.75% 0.72% 0.70% 0.71%

Non-Interest ExpenseSalaries & employee benefits expense 1.15% 1.10% 1.04% 1.00% 0.96% 0.91% 0.87% 0.90%

Net occupancy expense 0.19% 0.18% 0.17% 0.16% 0.16% 0.15% 0.14% 0.15%

Equipment expense 0.18% 0.17% 0.16% 0.18% 0.17% 0.16% 0.15% 0.16%

Amortization of intangibles 0.05% 0.05% 0.06% 0.05% 0.05% 0.04% 0.04% 0.04%

Outside services 0.20% 0.20% 0.18% 0.16% 0.14% 0.13% 0.11% 0.11%

FDIC insurance 0.07% 0.09% 0.10% 0.09% 0.08% 0.08% 0.07% 0.07%

Supplies 0.05% 0.05% 0.03% 0.02% 0.02% 0.02% 0.02% 0.02%

Telephone 0.04% 0.03% 0.03% 0.03% 0.03% 0.03% 0.02% 0.02%

Advertising & promotional expense 0.05% 0.05% 0.04% 0.03% 0.03% 0.03% 0.03% 0.03%

Other real estate owned 0.03% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Merger & acquisitions related 0.02% 0.17% 0.18% 0.17% 0.15% 0.14% 0.13% 0.13%

State taxes 0.05% 0.04% 0.03% 0.03% 0.03% 0.03% 0.02% 0.02%

Other non-interest expenses 0.16% 0.18% 0.14% 0.13% 0.12% 0.11% 0.10% 0.10%

Total non-interest expense 2.22% 2.34% 2.17% 2.08% 1.95% 1.83% 1.71% 1.75%

Income before income taxes 1.31% 1.13% 1.13% 1.02% 0.99% 0.95% 0.91% 0.97%

Income taxes 0.40% 0.35% 0.50% 0.22% 0.21% 0.20% 0.19% 0.20%

Net Income 0.91% 0.78% 0.63% 0.81% 0.78% 0.75% 0.72% 0.77%

Preferred stock dividends 0.05% 0.04% 0.03% 0.02% 0.02% 0.02% 0.02% 0.02%

Net Income available to common stockholders 0.86% 0.75% 0.61% 0.79% 0.76% 0.73% 0.70% 0.75%

F.N.B. Corp

Common Size Balance Sheet (% Assets)


AssetsCash & due from banks 1.18% 1.39% 1.30% 5.84% 10.56% 15.24% 19.83% 20.19%

Interest bearing deposits with banks 1.60% 0.31% 0.23% 0.42% 0.43% 0.44% 0.44% 0.44%

Cash & cash equivalents 2.79% 1.70% 1.53% 6.26% 10.99% 15.67% 20.27% 20.64%

Securities available for sale 9.29% 10.22% 8.80% 8.44% 8.08% 7.71% 7.34% 7.31%

Securities held to maturity 9.32% 10.70% 10.32% 10.09% 9.83% 9.55% 9.26% 9.23%

Residential mortgage loans held for sale 0.03% 0.05% 0.30% 0.29% 0.28% 0.27% 0.27% 0.26%

Loans, net of unearned income 69.43% 68.19% 66.84% 63.75% 60.64% 57.53% 54.46% 54.26%

Allowance for credit losses ‐0.81% ‐0.72% ‐0.56% ‐0.59% ‐0.61% ‐0.64% ‐0.67% ‐0.68%

Net loans & leases 68.62% 67.47% 66.28% 63.17% 60.03% 56.89% 53.79% 53.58%

Premises & equipment, gross 1.75% 1.86% 1.65% 1.59% 1.52% 1.45% 1.39% 1.44%

Less: accumulated depreciation 0.84% 0.75% 0.58% 0.58% 0.56% 0.55% 0.52% 0.54%

Premises & equipment, net 0.91% 1.12% 1.07% 1.01% 0.96% 0.91% 0.86% 0.89%

Goodwill 4.74% 4.72% 7.16% 6.42% 5.74% 5.12% 4.55% 4.40%

Core deposit & other intangible assets, net 0.26% 0.31% 0.29% 0.27% 0.25% 0.23% 0.21% 0.20%

Bank owned life insurance 1.76% 1.51% 1.68% 1.58% 1.48% 1.39% 1.30% 1.29%

Other assets 2.29% 2.20% 2.58% 2.47% 2.37% 2.26% 2.15% 2.18%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LiabilitiesNon-interest bearing demand deposits 17.43% 19.25% 18.21% 19.26% 20.32% 21.38% 22.45% 22.37%

Savings, NOW and Interest bearing demand deposits 40.43% 42.50% 38.38% 39.58% 40.69% 41.73% 42.69% 42.54%

Certificates & other time deposits 14.04% 11.79% 14.71% 14.11% 13.50% 12.88% 12.26% 12.22%

Total deposits 71.90% 73.54% 71.30% 72.95% 74.51% 75.99% 77.40% 77.12%

Short-term borrowings, net 11.67% 11.46% 11.71% 11.34% 10.95% 10.54% 10.13% 10.29%

Long-term debt 3.65% 2.47% 2.13% 1.95% 1.78% 1.63% 1.48% 1.47%

Other liabilities 0.84% 0.76% 0.83% 0.81% 0.78% 0.75% 0.72% 0.73%

Total liabilities 88.06% 88.23% 85.97% 87.04% 88.02% 88.92% 89.73% 89.60%

Stockholders' EquityPreferred stock 0.61% 0.49% 0.34% 0.31% 0.27% 0.24% 0.22% 0.21%

Common Stock & APIC 10.31% 10.24% 12.85% 11.52% 10.30% 9.19% 8.17% 7.90%

Retained earnings (accumulated deficit) 1.39% 1.39% 1.17% 1.42% 1.66% 1.89% 2.09% 2.49%

Accumulated other comprehensive income (loss) ‐0.29% ‐0.28% ‐0.26% ‐0.24% ‐0.21% ‐0.19% ‐0.17% ‐0.16%

Treasury stock, at cost ‐0.07% ‐0.07% ‐0.06% ‐0.05% ‐0.05% ‐0.04% ‐0.04% ‐0.04%

Total stockholders' equity 11.94% 11.77% 14.03% 12.96% 11.98% 11.08% 10.27% 10.40%

Total liabilities and Stockholders' Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

F.N.B. Corp

Cost of Equity

Beta 0.81

Risk‐Free Rate 2.97%

Equity Risk Premium 4.80%

CAPM Cost of Equity 6.86%

F.N.B. Corp

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 3.00%

CV ROE 7.56%

CV NI Growth 10.57%

Cost of Equity 6.86%

Dividend Yield 3.60%

Net Income in CV 383.45

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E CV (2022)

Equity DCF Model

Free Cash Flow to Equity 145.15 145.15 145.15 145.15 5988.64

Number of Periods Discounting 1.00 2.00 3.00 4.00 4.00

Discounted FCFE 135.83 127.11 118.95 111.31 4592.35

PV (FCFE) 5085.54

Less: PV (ESOP) 0.00

PV (Equity) 5085.54

Number of Shares Outstanding 323.47

Instrinsic Value 15.72$

Target Price 15.87$

Today 4/15/2018

Last FY End 12/31/2017

Next FY End 12/31/2018

Days in Year 365.00

Days YTD 105.00

Fraction of Year Passed 0.29

EP Model 2018E 2019E 2020E 2021E CV (2022)

EP ‐27.00 ‐12.15 0.50 11.77 35.40

CV (t=4) 916.51

Discounting Periods 1.00 2.00 3.00 4.00 4.00

Discounted EP ‐25.27 ‐10.64 0.41 9.02 702.82

Equity EP PV 5085.54

Less: PV (ESOP) 0.00

Equity EP 5085.54

Number of Shares Outstanding 323.47

Intrinsic Value 15.72$

Target Price 15.87$

F.N.B. Corp

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E CV (2022)

EPS 0.85$ 0.93$ 1.00$ 1.07$ 1.19$

Key Assumptions CV growth 3.00%

CV ROE 7.56%

Cost of Equity 6.86%

Future Cash Flows P/E Multiple (CV Year) 11.25

EPS (CV Year) 1.19$

Future Stock Price 12.03

Dividends Per Share 0.48$ 0.48$ 0.48$ 0.48$ 0.48$

Future Cash Flows 0.48$ 0.48$ 0.48$ 0.48$ 12.03$

1 2 3 4 4

Discounted Cash Flows 0.45$ 0.42$ 0.39$ 0.37$ 9.22$

Intrinsic Value 10.85$

Adjusted Price Per Share 11.06$

For Discounting:

Number of Periods 1 2 3 4 4

Model Date 4/15/2018

Next FYE 12/31/2018

Last FYE 12/31/2017

Days in FY 365

Days to FYE 105

Elapsed Fraction 0.29

F.N.B. Corp

Relative Valuation Models

EPS EPS BV BV Ticker Company Price 2018E 2019E P/E 18 P/E 19 EquityShares Out. per Share P/B

ASB Associated Banc‐Corp $24.85 $1.76 $1.96 14.12 12.68 3237.44 150.88 21.46 1.16

CFR Cullen/Frost Bankers, Inc $106.07 $6.34 $6.88 16.73 15.42 3297.86 63.69

EWBC East West Bancorp, Inc $62.54 $4.39 $4.93 14.25 12.69 3841.95 144.44 26.60 2.35

CBSH Commerce Bancshares, In $59.91 $3.39 $3.60 17.67 16.64 2716.56 105.56 25.74 2.33

WBS Webster Financial Corp $55.40 $3.38 $3.70 16.39 14.97 2701.96 91.97 29.38 1.89

HBHC Hancock Holding Company $51.70 $3.85 $4.21 13.43 12.28 2884.95 84.70

NYCB New York Community Ban $13.03 $0.86 $0.92 15.15 14.16 6795.38 487.07 13.95 0.93

VLY Valley National Bank $12.46 $0.90 $1.01 13.84 12.34 2533.17 264.04

WTFC Wintrust Financial Corpora $86.05 $5.55 $6.20 15.50 13.88 2976.94 54.70 54.42 1.58ISBC Investors Bancorp Inc $13.64 $0.76 $0.80 17.95 17.05 3125.45 290.18 10.77 1.27

$48.57 $3.12 Average 15.50 14.21 3,411.17 173.72 26.04 1.64

FNB F.N.B. Corp $13.34 $0.85 $0.93 15.7 14.4 4,409.2 302.2 14.59 0.91

Implied Relative Value:

P/E (EPS18) $ 13.21

P/E (EPS19) 13.15$

P/B 23.98$

F.N.B. Corp

Key Management Ratios

Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)

Activity or Asset‐Management RatiosLoan to Asset Ratio (Net Loans & Leases/Total Assets) 68.62% 67.47% 66.28% 63.17% 60.03% 56.89% 53.79% 53.58%

Loan Growth ((Net Loans & Leases₁‐Net Loans & Leases₀)/ Net Loans & Leases₀) 8.34% 22.33% 41.28% 6.29% 6.29% 6.28% 6.28% 2.97%

Total Asset Growth ((Toal Assets₁‐ Total Assets₀)/Total Assets₀) 8.87% 24.42% 43.82% 11.53% 11.85% 12.14% 12.41% 3.37%

Deposit Growth ((Total Deposits₁‐ Total Deposits₀)/ Total Deposits₀) 10.91% 27.27% 39.43% 14.12% 14.24% 14.37% 14.49% 3.00%

Financial Leverage RatiosDebt Ratio ((ST Debt+ LT Debt)/ Total Assets 15.32% 13.93% 13.83% 13.29% 12.73% 12.17% 11.61% 11.75%

Loans to Deposits ratio (Net Loans & Leases/ Total Deposits) 95.44% 91.74% 92.96% 86.59% 80.56% 74.86% 69.50% 69.48%

Debt to Equity Ratio ((ST Debt+ LT Debt)/ Total Equity) 128.35% 118.31% 98.58% 102.57% 106.30% 109.81% 113.09% 113.04%

Profitability RatiosNet Interest Margin (Net Interest Income/ Net Loans & Leases) 4.14% 4.15% 4.06% 3.81% 3.80% 3.78% 3.76% 3.81%

Net Interest Spread ((Interest Income from Loans/ Loans Receivable)‐ (Interest Expense from Deposits/ Interest Bearing Deposits)) 3.48% 3.53% 3.48% 3.40% 3.40% 3.40% 3.40% 2.95%

Efficiency Ratio (Non‐Interest Expense/ Total Income) 55.07% 58.04% 55.29% 57.66% 56.57% 55.60% 54.70% 54.54%

Payout Policy RatiosPayout Ratio (Dividends per share/ Earnings per share) 55.17% 60.76% 76.19% 56.34% 51.87% 48.13% 44.87% 40.49%

Retention Ratio (1‐ Payout Ratio) 44.83% 39.24% 23.81% 43.66% 48.13% 51.87% 55.13% 59.51%

15.87$ 6% 6.5% 6.86% 7% 7.5% 8% 8.5% 9% 9.50% 15.87 19.0% 20.0% 21.0% 22.0% 23.0% 24.0% 25.0% 26.0%

Inflation Rate 1.50% 23.00 19.61 17.70 17.06 15.09 13.51 12.22 11.142472 10.234899 3.0% 17.97 17.67 17.37 17.08 16.78 16.49 16.19 15.89

1.75% 22.40 19.10 17.25 16.63 14.71 13.17 11.92 10.872571 9.9899471 Interest on Loans 3.5% 17.26 16.98 16.69 16.40 16.11 15.83 15.54 15.25

2.00% 21.80 18.59 16.79 16.19 14.33 12.83 11.61 10.600021 9.742589 4.0% 16.56 16.28 16.00 15.73 15.45 15.17 14.89 14.61

2.25% 21.19 18.08 16.33 15.75 13.94 12.49 11.31 10.3248 9.492808 4.1% 16.42 16.15 15.87 15.59 15.31 15.04 14.76 14.48

2.50% 20.57 17.56 15.87 15.30 13.55 12.15 11.00 10.04689 9.240586 4.5% 15.86 15.59 15.32 15.05 14.78 14.51 14.24 13.97

2.75% 19.95 17.04 15.40 14.85 13.16 11.80 10.69 9.766272 8.985906 5.0% 15.16 14.90 14.64 14.37 14.11 13.85 13.59 13.33

3.00% 19.32 16.51 14.93 14.40 12.76 11.45 10.38 9.4829251 8.72875 5.5% 14.46 14.20 13.95 13.70 13.45 13.19 12.94 12.69

3.25% 18.69 15.97 14.45 13.94 12.36 11.09 10.06 9.1968309 8.4691004 6.0% 13.76 13.51 13.27 13.02 12.78 12.54 12.29 12.05

15.87$ 2.6% 2.7% 2.8% 2.9% 2.97% 3.0% 3.1% 3.2% 3.3%

3% 14.42 14.02 13.63 13.27 13.01 12.93 12.60 12.29 11.993093 15.87$ 0.65 0.7 0.75 0.8 0.81 0.85 0.9 0.95

Commerical Real Estate Loan Growth % 4% 15.19 14.76 14.35 13.97 13.70 13.60 13.26 12.93 12.615044 0.60% 19.80 18.34 17.08 15.97 15.77 15.00 14.13 13.36

5% 15.98 15.52 15.09 14.69 14.40 14.30 13.94 13.59 13.25569 Interest Rate on Deposit 0.65% 19.87 18.40 17.13 16.02 15.82 15.04 14.18 13.40

6% 16.79 16.31 15.86 15.43 15.12 15.02 14.63 14.27 13.9154 0.70% 19.93 18.46 17.19 16.07 15.87 15.09 14.22 13.44

7% 17.62 17.12 16.64 16.19 15.87 15.76 15.35 14.96 14.59453 0.75% 20.00 18.52 17.24 16.13 15.92 15.14 14.27 13.498% 18.48 17.95 17.45 16.97 16.63 16.52 16.09 15.68 15.29347 0.80% 20.06 18.58 17.30 16.18 15.97 15.19 14.31 13.53

9% 19.37 18.81 18.28 17.78 17.42 17.30 16.85 16.42 16.012586 0.85% 20.13 18.64 17.35 16.23 16.02 15.24 14.36 13.57

10% 20.28 19.69 19.13 18.61 18.23 18.11 17.63 17.18 16.752263 0.90% 20.19 18.70 17.41 16.28 16.07 15.29 14.40 13.61

0.95% 20.26 18.76 17.46 16.33 16.12 15.33 14.45 13.66

Risk Premium

15.87$ 4.50% 4.60% 4.70% 4.80% 4.90% 5% 5.10% 5.20% 5.30%

9% 18.60 18.17 17.77 17.38 17.01 16.65 16.31 15.98 15.67

Interest Bearing Demand Deposit Growth % 10% 18.34 17.93 17.53 17.15 16.78 16.43 16.09 15.77 15.46

11% 18.08 17.67 17.28 16.90 16.54 16.20 15.87 15.55 15.24

12% 17.81 17.41 17.03 16.66 16.30 15.96 15.63 15.32 15.02

13% 17.54 17.14 16.76 16.40 16.05 15.72 15.40 15.09 14.79

14% 17.26 16.87 16.49 16.14 15.80 15.47 15.15 14.85 14.56

15% 16.97 16.58 16.22 15.87 15.53 15.21 14.90 14.60 14.32

16% 16.67 16.29 15.93 15.59 15.26 14.94 14.64 14.35 14.07

Cost of Equity

Rf

Tax Rate

Beta

F.N.B. Corp

Value Driver Estimation

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)

In MillionsSimple FCFE

Net Income 151.61 162.85 191.16 275.56 299.35 322.59 346.03 383.45

Change in Assets 1430.57 4287.16 9572.82 3622.92 4151.59 4757.37 5453.40 1666.72

Change in Liabilities 1355.85 3811.72 7735.24 3492.51 3997.38 4579.92 5252.52 1428.43

Free Cash Flow to Equity 76.88 ‐312.58 ‐1646.41 145.15 145.15 145.15 145.15 145.15

Total Stockholders Equity 2096.18 2571.62 4409.19 4539.60 4693.81 4871.25 5072.14 5310.43

Return on Equity 7.50% 7.77% 7.43% 6.25% 6.59% 6.87% 7.10% 7.56%

Equity Economic Profit 151.61 162.85 191.16 275.56 299.35 322.59 346.03 383.45

Formal FCFE

Interest Income 546.80 678.96 980.33 989.20 1056.58 1127.42 1203.23 1273.64

Interest Expense 48.57 67.45 133.89 145.39 162.65 182.28 204.62 230.80

Provision for Credit Losses 40.44 55.75 61.07 29.85 34.94 40.91 47.89 16.65

Net‐Interest Income 457.78 555.76 785.36 813.96 858.99 904.24 950.71 1026.19

Non‐Interest Revenue 162.41 201.76 252.45 272.64 294.46 318.01 343.45 360.63

Non‐Interest Expense 390.55 511.13 681.54 727.61 764.34 803.73 845.97 891.27

Net Non‐Interest Income ‐228.14 ‐309.37 ‐429.09 ‐454.97 ‐469.88 ‐485.71 ‐502.52 ‐530.64

Pre Tax Income 229.64 246.39 356.27 358.99 389.11 418.52 448.20 495.55

Taxes 69.99 75.50 157.07 75.39 81.71 87.89 94.12 104.07

Preferred Stock Dividends 8.04 8.04 8.04 8.04 8.04 8.04 8.04 8.04

Net Income 151.61 162.85 191.16 275.56 299.35 322.59 346.03 383.45

Depreciation , Amortization, Accretion 12.96 15.03 20.49 18.76 18.76 18.76 18.76 18.76

Cash from Operations 164.57 177.88 211.65 294.32 318.12 341.35 364.79 402.21

Sources of Cash

+ Increase in Deposits 1241.26 3442.18 6334.08 3161.92 3641.22 4196.17 4838.98 1147.14

+ Increase in Debt 165.52 352.13 1304.01 309.61 333.50 359.29 387.12 267.02

+ Increase in Other Liabilities ‐50.93 17.41 97.16 20.98 22.65 24.47 26.42 14.27

Sources of Cash 1355.85 3811.72 7735.24 3492.51 3997.38 4579.92 5252.52 1428.43

Uses of Cash

Net Loans 927.32 2690.46 6084.50 1310.30 1391.94 1478.38 1569.87 790.44

+ Increase in Securities Held 280.21 1301.70 1437.50 485.32 525.13 568.25 614.96 246.02

+ Increase in Residential Mortgage Loans Held For Sale ‐1.40 7.13 80.98 8.36 9.11 9.93 10.83 3.93

+ Increase in Gross PPE 3.28 99.90 113.07 36.97 39.60 42.42 45.44 48.67

+ Increase in Core deposit & other intangible assets, net ‐1.86 21.68 24.75 2.76 2.85 2.93 3.02 1.04

+ Increase in Cash and Equivalents 201.73 ‐117.71 108.04 1714.89 2113.36 2580.22 3128.06 523.06

+ Increase in Bank Owned Life Insurance 6.42 21.96 196.67 26.34 27.66 29.04 30.49 19.21

+ Increase in Other Assets 26.96 78.02 330.74 56.73 60.70 64.95 69.50 53.12

Uses of Cash 1442.66 4103.14 8376.24 3641.68 4170.35 4776.13 5472.16 1685.48

Formal FCFE 77.75 ‐113.54 ‐429.36 145.15 145.15 145.15 145.15 145.15

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol FNB

Current Stock Price $13.34

Risk Free Rate 2.97%

Current Dividend Yield 3.60%

Annualized St. Dev. of Stock Returns 38.80%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 0.162 4.87 3.07 7.65$ 1$

Range 2 0.119 6.84 3.31 6.21$ 1$

Range 3 0.432 9.33 3.80 4.86$ 2$

Range 4 0.009 12.48 0.69 2.04$ 0$

Total 0.72 7.96$ 3.51 6.89$ 4$

Implied Number of Options Exercised per Year (000000s) 2.05595E‐07

Forecasted Number of Options Exercised Per Year (000000s) 2.05595E‐07

2018E 2019E 2020E 2021E 2022EForecasted Strike Price 7.96$ 7.96$ 7.96$ 7.96$ 7.96$

Number of Options Exercised 0.0 0.0 0.0 0.0 0.0

Increase in Common Stock 0.00 0.00 0.00 0.00 0.00

Allocation to Par Value ($0.01) 0.00 0.00 0.00 0.00 0.00

Allocation to Paid In Capital 0.00 0.00 0.00 0.00 0.00

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Out

Number of Options Outstanding (shares): 0.72

Average Time to Maturity (years): 3.51

Expected Annual Number of Options Exercised: 0

Current Average Strike Price: 7.96$

Cost of Equity: 6.86%

Current Stock Price: $13.34

2018E 2019E 2020E 2021E CV (2022)

Increase in Shares Outstanding: 0.000 0.000 0.000 0.000 0.000

Average Strike Price: 7.96$ 7.96$ 7.96$ 7.96$ 7.96$

Increase in Common Stock Account: 0.00 0.00 0.00 0.00 0.00

Change in Treasury Stock ‐0.096 ‐0.096 ‐0.097 ‐0.097 ‐0.097

Expected Price of Repurchased Shares: 13.34$ 14.26$ 15.23$ 16.28$ 17.40$

Number of Shares Repurchased: (0.007) (0.007) (0.006) (0.006) (0.006)

Shares Outstanding (beginning of the year) 323 323 323 323 323

Plus: Shares Issued Through ESOP 0.000 0.000 0.000 0.000 0.000

Less: Shares Repurchased in Treasury (0.007) (0.007) (0.006) (0.006) (0.006)

Shares Outstanding (end of the year) 323 323 323 323 323

Spring 2018 Financial Services F.N.B. Corporation (NYSE: FNB) · term rates and long-term rates...

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