UBNC - F.N.B. Corporation Is Set To Grow By Both M&A And Organic Means

• The upcoming acquisition of UB Bancorp will boost the loan book by around 2.5%, expand the margin, and result in significant cost savings.
• FNB is currently working to organically expand in Virginia, including Washington D.C.
• The December 2022 target price suggests a high upside from the current market price. Further, FNB is offering a decent dividend yield.

Earnings of F.N.B. Corporation ( FNB ) will benefit from the upcoming acquisition later this year, which will boost the loan book size, increase the margin, and result in cost savings. The benefits of the Howard Bank acquisition earlier this year will also boost earnings. Moreover, F.N.B. Corporation is currently implementing several plans to boost organic growth. Overall, I'm expecting the company to report earnings of $1.17 per share for 2022, and $1.53 per share for 2023. Compared to my last report on F.N.B. Corporation, I have slightly increased my earnings estimate for 2022 because of the recent acquisition announcement and the greater-than-expected interest rate hike. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on F.N.B. Corporation.

The Bulk of the Acquisition Benefits to Materialize Next Year

After the acquisition of Howard Bank in the first quarter of 2022, F.N.B. Corporation is gearing up for another acquisition. The company has recently entered into an agreement to acquire UB Bancorp ( OTCQX:UBNC ) in late 2022. The acquisition is likely to boost F.N.B. Corporation's loan book by around 2.5%, according to details given in the merger presentation .

Further, the acquisition will improve F.N.B. Corporation’s deposit mix as UB Bancorp has a large balance of low-cost deposits. UB Bancorp had an average cost of deposit of only 0.11%, while F.N.B. Corporation had an average cost of 0.22%. Moreover, UB Bancorp had a lower deposit beta than F.N.B Corporation. As mentioned in the presentation, UB Bancorp had a deposit beta of 23% while F.N.B. had a deposit beta of 29% in the last rising-rate environment, from the third quarter of 2015 to the second quarter of 2019.

The biggest benefit of the upcoming acquisition is significant cost savings. F.N.B. Corporation's 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 network overlap between F.N.B. Corporation and UB Bancorp. As mentioned in the presentation, around 33% of UB Bancorp’s branches are within three miles of an F.N.B. branch.

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

Organic Growth Outlook is Also Bright

F.N.B. Corporation has recently dialed up its organic loan growth efforts. Earlier this month, the company announced expansion into Baltimore, MD, and recently it has announced to expand its footprint in the Washington D.C. area and Richmond, VA. The company has also filed applications to open branches in Reston, VA, and Arlington, VA. This healthy pipeline of growth plans means we can expect organic loan growth to remain robust through at least the middle of next year.

The management mentioned in the second quarter's earnings presentation that it is expecting high-single-digit organic loan growth for 2022, excluding both the Howard Bank acquisition in the first quarter of 2022 and the upcoming UB Bancorp acquisition.

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

In my last report on F.N.B. Corporation, I estimated earnings of $1.05 per share for 2022. I've increased my earnings estimate because of the UB Bancorp acquisition announcement and the greater-than-expected interest rate hike.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation. The new Omicron subvariant also bears monitoring.

High Price Upside Justifies a Buy Rating

F.N.B. Corporation is offering a dividend yield of 4.0% at the current quarterly dividend rate of $0.12 per share. The earnings and dividend estimates suggest a payout ratio of 41% for 2022, which is below the five-year average of 51%. Therefore, there is room for a dividend hike. Nevertheless, to be on the safe side, I’m not incorporating an increase in the dividend level for my investment thesis.

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

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

Equally weighting the target prices from the two valuation methods gives a combined target price of $14.5 , which implies a 22.5% upside from the current market price. Adding the forward dividend yield gives a total expected return of 26.5%. Hence, I’m adopting a buy rating on F.N.B. Corporation.

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