TODAY BUSINESS STRATEGIES Total Money Management from the professionals at First National Bank Today’s Defining Risks and Opportunities IN THIS ISSUE:
Vincent J. Delie, Jr. Chairman, President and CEO F.N.B. Corporation First National Bank 02 Pressures and uncertainty stemming from the COVID-19 pandemic and global events of the past several months, including the Russian military invasion of Ukraine, continue to have a distinct impact on our personal and professional lives. We all are operating in a complex business landscape — one that is increasingly defined by both prominent risks and opportunities. In this edition of Business Strategies Today, our experts weigh in on the issues and themes that are top of mind for business owners and decision makers throughout our service area. With inflation at its highest level in decades, global supply chain challenges continuing to cause disruption, and the potential for each to be further complicated by geopolitical tensions, we outline strategies to protect your business and profit margins so that you can stay focused on results. The perfect storm of economic factors we have experienced this year also has resulted in a uniquely active market for mergers and acquisitions (M&A). FNB’s commercial bankers, as well as our Capital Markets group, provide insight into key considerations when capitalizing on an expansion opportunity. In the final article in this issue, we discuss the implications of new regulations affecting health plan sponsors, which will require new reporting structures and the collection of vast amounts of data. Our risk management experts offer valuable perspective to both fulfill the requirements and use the information to benefit your company and employees. The world continues to change very rapidly, and we have endured many new and challenging events over the last few years. FNB has come through strongly thanks to our dedicated teams, deep product set, expertise and steadfast commitment to do what is right for our clients and communities. We are here to support you and your business and will partner with you as a team to navigate any scenario we may face in the future. We look forward to working alongside our clients as they strive to achieve their business and personal goals in this shifting environment. THE FIRST NATIONAL BANK DIFFERENCE First National Bank, the largest subsidiary of F.N.B. Corporation (NYSE: FNB), is a growing financial services organization with a long-standing tradition of helping our customers and communities thrive. Throughout more than 150 years of service, we have remained dedicated to providing total money management solutions for our consumer, small business and commercial clients. We have a core business concentration on middle and upper middle market companies and serve their needs as a value-added partner. MORE INSIGHT FROM FNB You can always look to FNB for expertise on the topics and trends that have the greatest impact on you and your business. In Business Strategies Today, experts from across our Company have covered a wide range of subjects, such as making the most of the economic environment, staying the course to innovation and planning for the future of your business. Just a few of the topics we’ve covered recently include: check International Expansion check Interest Rate Management check Payments Solutions check Wealth Management check Succession Planning check Cybersecurity check M&A To learn more about topics that may benefit your business, call us at 1-866-362-4603 or visit fnb-online.com/bst
FNB Branch/ATM FNB Planned Expansion Branch/ATM 03 04 NAVIGATING INFLATION RIGHT TIME, RIGHT FIT, RIGHT PRICE: EVALUATING AND FINANCING M&A OPPORTUNITIES 08 10 06 SUPPLY CHAIN DISRUPTIONS: MANAGING INTERNATIONAL RISK NEW REGULATORY REQUIREMENTS FOR HEALTH PLAN SPONSORS FULL-SERVICE SOLUTIONS COMMERCIAL BANKING* • Corporate & Business Banking • Investment Real Estate • Builder Financing • Asset-Based Lending • Lease Financing • Capital Markets • Mezzanine Financing • Treasury Management • International Banking • SBA Lending • Government Banking CONSUMER BANKING* • Deposit Products • Mobile & Online Banking • Mortgage Banking • Consumer & Small Business Lending * Bank deposit products and services provided by First National Bank of Pennsylvania. Member FDIC. Equal Housing Lender. INSURANCE • Property & Casualty • Employee Benefits • Personal • Title WEALTHMANAGEMENT • Trust & Fiduciary • Retirement Services • Investment Advisory • Brokerage • Private Banking Not FDIC/NCUSIF Insured Not Guaranteed by the First National Bank of Pennsylvania or its affiliates May Lose Value Not Insured by Any Federal Government Agency Not a Bank Deposit First National Bank of Pennsylvania does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Why has inflation escalated? The pandemic created a perfect storm of anomalous factors. Taking a very broad look, many consumers spent months in lockdown accumulating savings that were strengthened by government stimulus — only to be let loose into a reopening economy plagued by supply chain breakdowns that shot materials costs sky high and made it impossible for companies to meet the accelerated demand. Meanwhile, a sustained nationwide labor shortage has compounded supply chain issues and driven wages higher as companies compete for talent. [See page 6 for strategies to navigate supply chain challenges.] Together, these pressures have a snowball effect that may be compounded by the economic aftershocks of the Russia-Ukraine conflict. Prices keep going up as companies respond to significant demand and the challenges and expenses they face to meet it. Want an example? Look no further than soaring lumber prices, rising rents or the nearly 40 percent increase in the price of used cars during 2021 after unexpected demand hit a supply of new vehicles limited by supply chain constraints. For decades, elevated inflation has been like an economic specter, discussed more in classrooms than board or living rooms. Today, inflation and its impact are very real, with the consumer price index (CPI) and other measures reaching their highest levels in decades. With global events layering on more uncertainty, it is important to understand the economic environment and steps businesses can take to navigate it. 04 FNB-ONLINE.COM nav i gat i ng inflation
05 BUSINESS STRATEGIES TODAY • SPRING 2022 Call FNB at 1-866-362-4603 to talk to an expert about ways to manage an inflationary environment. What is the impact? Inflation is complex. On one hand, it signals growth, with increased wages and prices that can put some people and businesses in better positions to pay down debt. On the other, these increases can be hard for businesses or individuals on fixed incomes to absorb. The Federal Reserve (Fed) is taking steps to cool down the heating economy by increasing interest rates and halting or reversing other actions it took, such as rapidly increasing bond purchases, to stimulate the economy during the pandemic crisis. How to manage? Managing a business through inflation can be challenging. Add in the hurdles presented by the pandemic and geopolitical unrest and companies are in largely uncharted territory. Do not overcorrect in response. It is unlikely that demand can sustain peak levels and overinvestment in inventory could have adverse consequences when supply chains and buying activity normalize. Instead, look for opportunities to strengthen your organization long-term. For example: caret-right L ook beyond compensation to position yourself positively with talent. Evaluate your benefits to ensure you are competitive and in touch with employee needs and preferences. Hedging Against inflation With ongoing uncertainty caused by the pandemic stoked even further by conflict in Europe, there are questions about how high interest rates may go as the Fed seeks to manage inflation. Do not let concerns about inflation or interest rates preclude strategic investments in your company. An interest rate hedge, or swap, can be an effective tool to insulate your business from a potential rising rate environment so that you can stay on track toward your goals, whether you are refinancing existing credit or seeking capital for expansion or other improvement opportunities. It is important to remember that rates are increasing from near-historic lows, so it may be to your benefit to lock in rates in the near-term. caret-right Make sure you have adequate cash flow to navigate through the cycle and beyond. – Negotiate flexible pricing contracts with both suppliers and customers. – Analyze your income statement for opportunities to cut costs before passing them on to your customers, which can affect brand loyalty. – Invest in automation, especially for production or administrative processes, to improve efficiency and enable employees to focus on meaningful work. This also could provide relief for teams that are potentially short-staffed due to hiring challenges. caret-right Keep an eye on avenues for growth. If organic expansion is cost prohibitive, consider whether an acquisition or merger may present an economy of scale, enabling you to diversify your client or product base on a diluted cost basis. [See our article on evaluating and financing M&A on page 8.] caret-right Prepare for inflation’s impact on your personal investments. A trusted advisor can guide you through patient portfolio management, risk-conscious investments in assets such as gold, and other buffers against volatility. Throughout, it is important toworkwith a partner like FNBwho has comprehensive capabilities and a strategic understanding of your complete financial picture.
06 FNB-ONLINE.COM Companies have been adversely impacted by breakdowns in the global supply chain, both logistically and financially. The complex landscape is influenced by a range of factors, such as inflation, labor shortages, continued COVID-19 disruptions and geopolitical events like the invasion of Ukraine. These pressures impact the supply chain and broader global markets — particularly, the foreign exchange (FX) market — and may further exacerbate existing issues. Ongoing delays and uncertainty are presenting many businesses with cash flow and customer service challenges directly related to delivery and fulfillment. To insulate against these challenges, businesses need to effectively manage risk attendant to supply chain disruption to stabilize, protect and enhance profit margins. FX Hedging As the Global Supply Chain Pressure Index — a measure of supply chain disruptions launched in January 2022 — remains elevated, businesses may struggle to accurately predict timelines for production, fulfillment and, as a result, payment. Factor in volatility, inflation, interest rates, geopolitical risks and their impact on the U.S. dollar, and companies must now contend with added risk through prolonged exposure to an unpredictable FX market. With the forward hedging strategies described here, businesses can protect against this volatility. For example, a business may consider an Outright Forward hedge, which predetermines the exchange rate that will be used on the scheduled transaction date. For a seller that receives payment when products ship — but is uncertain of when that may be due to delays — a Window Forward hedge will lock in an exchange rate for a set period. Payment at the determined rate can be completed at any time during the window, with an option to roll the hedge forward if delays continue beyond the rate’s maturation date. Supply Chain Disruptions: Managing Internat ional Risk
07 BUSINESS STRATEGIES TODAY • SPRING 2022 Any company looking to protect its downside risk and benefit from favorable exchange rates may consider a Participating Forward. Here, a company sets a protected rate for a percentage of the transaction. On the date the transaction is executed, if the exchange rate has improved, the business can complete payment at the favorable rate. If the market is unfavorable, the entire transaction is completed at the rate protected by the hedge. When a company has a big wait to complete a cross-border transaction (for example, during due diligence or waiting for regulatory approval), it may safeguard against unfavorable rate fluctuations with a Foreign Currency Hedging Option that guarantees an exchange rate. However, a business can walk away from the hedge to secure a more favorable rate to close its deal, time permitting. Supply Chain Financing While less frequently discussed than its logistical counterpart, disruptions to the financial supply chain —which includes the processes to make and receive payments — can have a significant impact. A business may employ multiple methods to protect or enhance their margins and manage payment risk. For example, with a supply chain financing agreement, or reverse factoring, a buyer’s bank may deliver immediate payment to a supplier while providing extended repayment terms to the buyer. This allows both buyer and supplier to maximize working capital while they navigate production and sales, providing a buffer against delays. Financing strategies can also enhance profitability by reducing the cost of the transaction for the buyer and seller. [Learn about another financing strategy in the “Letters of Credit” section below.] Supply Chain Management Companies relying on a concentrated network of international suppliers may consider regionalizing or reshoring. In a regional model, rawmaterials sourcing, processing and manufacturing all occur within one area of the world or country. In reshoring, a business will bring offshored supply chain links back to the U.S. While these changes may require a significant investment of both time and money, they could offer long-term protection in a scenario like the pandemic when entire nations were forced offline. Another international financing strategy is the use of Letters of Credit (LCs), which can transfer the risk from a buyer to its bank and safeguard against nonpayment. Additionally, LCs serve as contract insurance, prohibiting one side from walking away from a transaction without the required consent. LC strategies can provide benefits to both the buyer and the seller, while also allowing businesses to take advantage of more favorable interest rates between the participating countries. Letters of Credit caret-right Company ABC in the U.S. imports rawmaterials from Company XYZ in another country to manufacture widgets. caret-right On average, it takes four months for ABC to manufacture, sell and receive payment for the widgets. However, XYZ requires payment within 30 days. caret-right A Commercial LC is issued by ABC’s bank to provide payment for the rawmaterials while manufacturing/sales are completed. XYZ can use the LC as collateral to borrow from ABC’s bank and take advantage of their interest rates, rather than a bank in XYZ’s own country, where interest rates may be considerably higher. caret-right ABC gets a longer payment termwhile XYZ gets access to working capital and lowers its borrowing cost. Transaction cost is thereby reduced, and the profit margin is improved for both buyer and supplier. Contact FNB at 1-866-362-4603 to learn more about how our solutions can protect your business in a challenging supply chain environment. Here is an example of how a commercial LC works.
The M&A market remains active as companies seek to capitalize on a productive environment to search for opportunities to scale operations, add capabilities and increase market penetration. Pursuing M&A activities, though, requires a wide variety of considerations, from financing options and rising valuations, to supply chains and company culture. Right Time, Right Fit, Evaluating Targets: Due Diligence A comprehensive due diligence process is needed to determine if a target company is a right fit. Businesses must think critically about their unique criteria for a potential M&A target and what strategic objectives will be supported through expansion. Potential acquirers should consider the supply, customer and employee bases of a target company. caret-right Analyze where it sources materials. caret-right Understand its customer concentration and their loyalty to estimate potential performance. caret-right Evaluate its culture. Shared values can lead to a smoother, more productive transition. A buyer also needs to examine its own ability to prioritize resources to support a merger or acquisition, especially when time and capital are temporarily limited while the deal is being completed and returns have not yet been realized. Evaluating and Financing M&A Opportunities Right Price: 08 FNB-ONLINE.COM
Contact FNB at 1-866-362-4603 to discuss your options when considering or preparing for M&A activities. Valuation Volatility With many companies coming off strong years, valuations have spiked, and buyers face an inherent risk of overpaying for M&A. Before committing to a deal, buyers should recognize that a target company’s peak performance is unlikely to continue indefinitely. If a buyer is willing to complete a deal at a target’s peak cash flow valuation, they must be confident in research that shows the valuation is fair and performance can be sustained. Manage Transactional Risk Risk analysis and management is part of any transaction. FNB has solutions to protect your company’s interests, including Representations and Warranties Insurance (RWI) coverage for M&A deals. Learn more about RWI in the Manage Risk section of the Business Knowledge Center at fnb-online.com. The Bank’s Role Banks can play a critical role in executing successful M&A deals. Full-service banks, such as FNB, can improve results for their clients because they understand the company’s endto-end financial situation and can advise on the solutions that will best meet a business’ goals. With a relationship-based, consultative approach, FNB serves as a one-stop shop to support its clients’ personal and professional needs. Sophisticated Financing. FNB offers short- and long-term financing options, as well as sophisticated capital markets solutions, including mezzanine finance, corporate and municipal bond underwriting, interest rate management, syndications and international banking. Insurance and Employee Benefits. FNB provides insurance expertise, comprehensive risk analyses and a robust employee benefits offering to develop programs that protect your people and your assets. Treasury Management. FNB’s suite of Treasury Management tools are designed to manage cash efficiently and securely and to mitigate risk so that you can focus on daily and strategic business operations. Succession Planning and Financial Planning. As part of your total financial picture, FNB prepares business owners and executives for ongoing success with effective transition strategies, including Private Banking and Wealth Management solutions to support financial well-being for you, your family and your business. To learn more about FNB’s comprehensive products and services, visit eStore™ at fnb-online.com/eStore. 09 BUSINESS STRATEGIES TODAY • SPRING 2022 Financing Options: What is Best? Once a buyer is ready to act, it needs to decide the best way to finance the deal. There is excess capital and an influx of private equity in the market, and many businesses find themselves with additional cash at their disposal. While interest rates have begun to climb from their previously historic lows, there remains a range of viable financing options. Engaging finance partners early in the process can help determine an appropriate offer price as well as capital and credit strategies. To find the right financing solution, buyers should work with their lender to consider: caret-right What types of financing make the most sense — senior debt, mezzanine or otherwise? What amount of each are they willing to incur? caret-right How much equity are they willing or required to contribute? caret-right How much risk are they willing to assume? caret-right How much working capital and fixed asset financing (such as for machinery or real estate) will be needed? Howwill it impact operating cash flow? It is to the buyer’s benefit to work with a partner they know and trust as they navigate the financing process. This is especially true during times of uncertainty, when a knowledgeable advisor can assist in assessing the impact of geopolitical events, such as the evolving situation in Europe, economic trends and other factors.
10 FNB-ONLINE.COM When the Consolidated Appropriations Act (CAA) was signed into law in late 2020, in addition to sweeping pandemic relief and stimulus measures, it also included a number of provisions pertaining to group health plans. Requirements What Employers Need to Know New Regulatory for Health Plan Sponsors
11 BUSINESS STRATEGIES TODAY • SPRING 2022 As part of a substantial set of stipulations aiming to minimize billing surprises for participants and improve plan accountability and transparency overall, the CAA clarified the role of the plan sponsor as fiduciary, with four key requirements: Remove service provider gag clauses. Plan sponsors must attest that they have full contractual access to cost and quality information that service providers traditionally have limited. Report prescription data. Plan sponsors must report detailed information about prescriptions, including costs, how frequently drugs are dispensed and the impact of rebates, fees and other forms of renumeration on employee premiums. Disclose service provider compensation. Plan sponsors are required to obtain a comprehensive list of any direct or indirect compensation over $1,000 received by service providers in connection with their work for the health plan. Achieve parity in substance abuse and mental health benefits. Plan sponsors must demonstrate that mental health and substance abuse benefits are not subject to more non-quantitative treatment limitations (NQTLs) than are medical or surgical care benefits. Examples of NQTLs could be care restrictions based on provider type or requirements for prior authorization. Make Decisions with Data As more data becomes accessible, and as transparency is increasingly a focus for consumers and regulators alike, employers have an opportunity to embrace technology to maximize employee outcomes and reduce waste. Pairing sophisticated software with expert data analysis gives employers a holistic view of employee benefits preferences and results. They can use real numbers to determine how to position employees for success and identify the plan offerings that are critical to recruitment, retention and financial efficiency. Moreover, data-driven insights enhance the forecasting process with modeling that can predict future changes and establish multi-year strategic plans that are specific to a company’s goals. As a full-service provider with a robust risk management framework, FNB can guide employers through the process of using data to better understand big picture employee benefit solutions. What is fiduciary responsibility? Like retirement plans, health plan sponsors have a legal requirement to act in the best interest of plan participants based on the standards spelled out by the Employee Retirement Income Security Act of 1974 (ERISA) and the Public Health Service Act. Fiduciaries who fail to meet these standards may personally be liable to restore any losses to the plan that are caused by their actions. Together with other elements of the CAA, these provisions are expected to ensure that group health plans are structured to benefit participants. However, compliance with the new CAA provisions is a substantial undertaking — with the burden placed squarely on plan sponsors. FNB’s Insurance team is working closely with clients while they execute a four-step process: 1. Acknowledge fiduciary responsibilities. Businesses need to understand the scope of the ERISA requirements, the responsibilities for employers as fiduciaries and the serious implications for failure. In undertaking this process for the first time, determine how to stay on top of emerging guidance and deadlines that, while largely still being finalized, will likely come into play in 2022. 2. Gather the information required by CAA. Gathering the information required by the CAA will be challenging because parties in the value chain have not been required to report or release this information in the past. Fiduciaries must make strategic decisions based on how partners respond and act with urgency to establish the necessary processes. 3. Analyze the information and apply it to health plan design and structure. The significant effort to secure information required by the CAA can yield a beneficial return in the form of data analytics. Studies estimate that approximately one quarter of the $4 trillion spent on healthcare each year is waste. Employers will have greater visibility into what they are paying, what they are paying for and what benefits employees actually use, so they can benchmark performance, minimize wasteful spending and lower employee costs. 4. Establish a fiduciary process. Develop internal frameworks to track, store and present the influx of information, especially in the event of an audit. In any environment, shifting regulatory requirements can pose significant risk for businesses that lack mechanisms to stay current and compliant. A knowledgeable partner can be key to a company’s success. Contact an FNB Insurance expert at 1-800252-4850 to discuss strategies to navigate the CAA legislation and improve outcomes for your teams.
We’re committed to helping the business community do more. It starts with more advanced banking solutions to help launch new products, expand operations and enter new markets. We also offer more options for financing, from loans and lines of credit to asset-based, commercial real estate and SBA loans, as well as equipment financing and leasing. We offer more treasury management solutions to give you greater control over receivables and payments. We even offer more sophisticated capital markets solutions, including interest rate risk management, foreign exchange, trade finance, syndications and global trade solutions. Plus, we always deliver more personal assistance and more local expertise, making it easier for more businesses to achieve more of their goals. To learn—and get —more, visit fnb-online.com. BANK FOR YOUR BUCK. NMLS #766529 President’s “E” Award for Export Service Data as of May 2, 2022 MORE THAN 340 BRANCHES TOP 50 80+Excellence and Best Brand Awards SINCE 2011 $42 billion NEARLY $34 billion in assets in DEPOSITS MORE THAN 900 ATMS 4000+ EMPLOYEES Largest U.S. Bank Holding Companies FNB10-258 Coalition Greenwich COV I D STANDOUT