FNB Corporation shares set to grow both through mergers and acquisitions and organic means (NYSE:FNB)

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FNB Corporation Earnings (New York Stock Exchange: ETFs) will benefit from the acquisition coming later this year, which will increase the size of the loan book, increase the margin and lead to cost savings. Benefits from the Howard Bank acquisition earlier this year will also boost earnings. Additionally, FNB Corporation is currently implementing several organic growth plans. Overall, I expect the company to report earnings of $1.17 per share for 2022 and $1.53 per share for 2023. Compared to my last ETF Corporation report, I have slightly increased my earnings estimate for 2022 due to the recent acquisition announcement and higher than expected interest rate hikes. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on FNB Corporation.

Most of the benefits of the acquisition will materialize next year

Following the acquisition of Howard Bank in the first quarter of 2022, FNB Corporation is preparing for another acquisition. The company recently reached an agreement to acquire UB Bancorp (OTCQX: UBNC) in late 2022. The acquisition is expected to increase FNB Corporation’s loan portfolio by approximately 2.5%, according to details given in the merging presentation.

In addition, the acquisition will improve FNB Corporation’s deposit mix, as UB Bancorp has a large balance of low-cost deposits. UB Bancorp had an average deposit cost of just 0.11%, while FNB Corporation had an average cost of 0.22%. Additionally, UB Bancorp had a lower deposit beta than FNB Corporation. As mentioned in the presentation, UB Bancorp had a deposit beta of 23% while FNB had a deposit beta of 29% in the last rate hike environment, from the third quarter of 2015 to the second quarter of 2019.

The biggest benefit of the upcoming acquisition is significant cost savings. FNB Corporation management expects to save more than 45% of UB Bancorp’s non-interest expenses after the merger, as mentioned in the presentation. The significant cost savings are made possible by the overlapping networks between FNB Corporation and UB Bancorp. As mentioned in the presentation, approximately 33% of UB Bancorp branches are within five kilometers of an FNB branch.

However, FNB Corporation expects to report one-time merger expenses of approximately $17 million. Therefore, the benefit of the UB merger will not materialize until next year.

Organic growth prospects are also bright

FNB Corporation has recently stepped up its organic loan growth efforts. Earlier this month, the company announced its expansion into Baltimore, MD, and recently announced plans to expand its presence in the Washington DC and Richmond, VA area. The company has also filed applications to open branch offices in Reston, VA, and Arlington, VA. This healthy pipeline of growth plans means we can expect organic loan growth to remain robust at least through the middle of next year.

Management mentioned in the second quarter earnings presentation that it expects organic single-digit loan growth for 2022, excluding both the Howard Bank acquisition in the first quarter of 2022 and the next acquisition of UB Bancorp.

Overall, I expect the loan book to grow 16.9% in 2022 and 8.2% in 2023. Meanwhile, deposits and other balance sheet items will likely grow in line with loans until the end of 2023. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 20,824 21,973 23,093 25,096 24,624 28,781 31,153
Net loan growth 41.3% 5.5% 5.1% 8.7% (1.9)% 16.9% 8.2%
Other productive assets 6,171 6,654 6,807 7,499 10,340 9,426 10,203
Deposits 22,400 23,455 24,786 29 122 31,726 35,167 38,066
Loans and sub-debts 4,347 4,756 4,556 2,899 2,218 2,061 2,231
Common equity 4,302 4,501 4,776 4,852 5,043 5,619 6,002
Book value per share ($) 14.2 13.8 14.6 14.9 15.6 15.4 16.5
Tangible BVPS ($) 6.5 6.6 7.5 7.8 8.6 8.6 9.6

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Rising interest rates to also support earnings

The stronger than expected monetary tightening so far this year will further support earnings. The Federal Reserve has already raised the federal funds rate by 225 basis points this year.

Anticipating the rising rate environment, the ETF has significantly improved its deposit mix over the past twelve months. The proportion of non-interest-bearing deposits in total deposits fell from 33% at end-June 2021 to 35% at end-June 2022. Partly due to the composition of deposits, FNB Corporation’s balance sheet is quite sensitive to changes in interest rates. . Based on the results of management’s interest rate sensitivity analysis presented in the first quarter 10-Q filing, a 200 basis point increase in interest rates can increase net interest income by 13 .2% over twelve months.

Given these factors, I expect the net interest margin to increase by 30 basis points in the last two quarters of 2022. I think the worst of monetary tightening is now behind us and rates interest will begin to decline from next year. Therefore, I expect the margin to remain essentially flat in 2023.

Given the outlook for loans, margins and non-interest expenses, I expect ETF Corporation to report earnings of $1.17 per share for 2022 and $1.53 per share for 2023 The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 846 932 917 922 907 1,056 1,226
Allowance for loan losses 61 61 44 123 1 64 80
Non-interest income 252 276 294 294 330 317 322
Non-interest charges 681 695 696 750 733 780 739
Net income – Common Sh. 191 365 379 278 397 418 558
BPA – Diluted ($) 0.63 1.12 1.16 0.85 1.23 1.17 1.53

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

In my last ETF Corporation report, I estimated earnings of $1.05 per share for 2022. I raised my earnings estimate due to the announcement of the UB Bancorp acquisition and rising interest rate higher than expected.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, the threat of a recession may increase the provisioning of expected loan losses beyond my expectations. The new Omicron sub-variant should also be watched.

High Price Rise Warrants Buy Rating

ETF Corporation offers a dividend yield of 4.0% at the current quarterly dividend rate of $0.12 per share. Earnings and dividend estimates suggest a payout ratio of 41% for 2022, which is below the five-year average of 51%. There is therefore room for an increase in the dividend. Nevertheless, as a safety measure, I do not include an increase in the level of dividend for my investment thesis.

I use historical price/book tangible (“P/TB”) and price-earnings (“P/E”) multiples to value ETF Corporation. The stock has traded at an average P/TB ratio of 1.64 in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 6.5 6.6 7.5 7.8 8.6
Average market price ($) 14.1 13.1 11.6 8.5 12.0
Historical P/TB 2.18x 1.98x 1.56x 1.09x 1.40x 1.64x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $8.6 yields a price target of $14.1 for the end of 2022. This price target implies an upside of 18.8% compared to the closing price on July 27. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.54x 1.59x 1.64x 1.69x 1.74x
TBVPS – Dec 2022 ($) 8.6 8.6 8.6 8.6 8.6
Target price ($) 13.2 13.7 14.1 14.5 15.0
Market price ($) 11.9 11.9 11.9 11.9 11.9
Up/(down) 11.6% 15.2% 18.8% 22.5% 26.1%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 12.8x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 0.6 1.1 1.2 0.9 1.2
Average market price ($) 14.1 13.1 11.6 8.5 12.0
Historical PER 22.4x 11.7x 10.0x 9.9x 9.8x 12.8x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $1.17 yields a price target of $15.0 for the end of 2022. This price target implies a 26.1% upside from at the closing price on July 27. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 10.8x 11.8x 12.8x 13.8x 14.8x
EPS 2022 ($) 1.17 1.17 1.17 1.17 1.17
Target price ($) 12.6 13.8 15.0 16.1 17.3
Market price ($) 11.9 11.9 11.9 11.9 11.9
Up/(down) 6.4% 16.2% 26.1% 36.0% 45.8%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a target price of $14.5, implying a 22.5% upside from the current market price. Adding the forward dividend yield gives an expected total return of 26.5%. Therefore, I adopt a buy rating on FNB Corporation.

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