CFO OUTLOOK 2018 MIDDLE MARKET

CFO OUTLOOK 2018 MIDDLE MARKET

TABLE OF CONTENTS Summary and Key Findings...1 Growth in the Current Environment...2 Emerging Trends...6 An Increasingly Evolving Role...10

SUMMARY AND KEY FINDINGS We are pleased to share our 2018 CFO Outlook an initiative that supports Citizens Commercial Banking s ongoing commitment to provide actionable intelligence that our customers and other organizations can use to reach their potential. The findings come from a survey of 300 middle market CFOs and focus on the expanding responsibilities that today s CFOs face when it comes to driving corporate growth. In some areas, our findings vary greatly among lower middle market companies ($25MM to <$500MM) and upper middle market companies (>$500MM) and have been highlighted to demonstrate the difference. When the study was fielded at the end of Q3, 80% of CFOs had a positive outlook on economic growth in 2018. However, confidence in policy changes under the new administration is waning. CFOs still believe that changes to current tax policies will benefit their companies, but they have lower expectations that change to trade and regulatory policies will impact their bottom line. When these attitudes are combined with the muted-growth environment the country has experienced since the Great Recession, CFOs clearly recognize that they can t rely on broad economic growth or the external environment to lift their company. Instead, CFOs are looking at continuous improvement to fund future growth. To highlight this fact, 81% of the CFOs surveyed said one of their key objectives in 2018 is to improve operational efficiencies, followed by expansion into new domestic markets and the development of new products. To fuel these efforts, CFOs will take advantage of emerging technology trends. They expect to increase their use of electronic payments, and invest more in both data scientists and big data technologies. This, in turn, has CFOs reporting that greater technology awareness and adoption is viewed as the most important new skill they must acquire. At Citizens, we realize that CFOs are encountering change like never before. In addition to managing the corporate financials, they are now expected to shape organizational strategies, identify new business opportunities and expand the use of technology creating a role more akin to a Chief Growth Officer. Given this reality, CFOs need a trusted strategic and financial advisor who has the knowledge and resources to help them quickly take advantage of new opportunities. At Citizens, we earn this role every day by delivering objective advice, tailored solutions and timely execution, and welcome the opportunity to discuss how we can help your company reach its potential. 1

GROWTH IN THE CURRENT ENVIRONMENT Positive Economic Momentum Should Continue CFOs have positive expectations for the economy in 2018. Half expect improvement and another 30% believe economic growth will remain the same. CFO optimism is significantly higher among upper middle market companies compared to lower middle market companies. Economic Outlook Worsen 20% Stay the same 30% Improve 50% The upshot of this positive economic view is evident in corporate growth expectations. More than half of the CFOs surveyed are extremely confident that their company will hit their growth targets and only 9% lack confidence. Confidence in 2018 Company Growth 55% 36% 9% Extremely confident (10-8) Moderately confident (7-6) Not confident at all (5-1) 2

Tax Reform is Expected to Amplify Business Growth The 2016 Presidential election created the expectation that major policy initiatives would help spur corporate growth. At this point, CFOs are still optimistic about federal tax policy changes and a majority (60%) believe the anticipated federal tax policy changes would amplify company growth, dwarfing the 6% of CFOs expecting a negative impact. However, the anticipated business impact of the other three major initiatives trade, regulatory relief and monetary are divisively split. Factors Influencing Business Growth Federal tax policy 60% 35% 6% Trade agreement/trade policy 25% 55% 20% Federal regulatory policy 21% 55% 24% Monetary policy 17% 56% 27% Positive impact (10-8) Moderate impact (7-6) Negative impact (5-1) 3

Efficiency and Expansion Lead the Way Taking cost out of the business will remain a primary focus for CFOs. This powerful trend will continue near-term as 81% of CFOs are focused on improving operations in the next 12 months. Nearly half of firms will seek to expand in domestic markets or develop new products. Fewer firms will look to undertake initiatives like international expansion, divestiture or acquisition. When it comes to acquisition, two-thirds of upper middle market companies expect to pursue this action over the next 3 years. Opportunities for Growth Focus on improving operational efficiency 81% 12% 6% Expansion into new domestic markets 47% 35% 19% Internal development of new products 46% 27% 27% Expansion into new international markets 16% 20% 64% Acquisition of new products 10% 20% 70% Acquisition of another company 5% 24% 71% Upper middle market >$500MM 9% 56% 35% Lower middle market $25MM to <$500MM 4% 19% 77% Divestiture or selling parts of the company 4% 8% 88% Next 12 months 1 to 3 years No plans to pursue Next 12 months 1 to 3 years No plans to pursue 4

Global Expansion Strategies Vary by Industry International expansion is a much greater focus for upper middle market firms as compared to lower middle market firms, with 66% seeing it as an opportunity for 2018. As these global opportunities are assessed, distinct patterns are apparent with different industries targeting different regions. APAC is a leading market for expansion opportunity across industries. Western Europe is a focus as well, particularly for the Retail and Hospitality industries. The Middle East is emerging as a target for manufacturing and services companies. International Markets Being Considered Overall Manufacturing Business & Professional Services Retail & Hospitality Other Asia-Pacific 44% 44% 47% 40% Western Europe 42% 41% 35% 53% China 42% 41% 47% 40% Middle East 33% 41% 41% 7% Australia 29% 26% 35% 27% Eastern Europe 24% 24% 29% 20% Japan 20% 24% 18% 13% Canada 18% 15% 18% 27% Central/South America 18% 26% 6% 13% Mexico 17% 18% 6% 27% Africa 9% 12% 12% -- Russia 8% 12% 6% -- Upper middle market >$500MM 5

EMERGING TRENDS Greater Utilization of Electronic Payments In the near term, CFOs are looking to increase their utilization of electronic payment technologies to drive greater business efficiencies, reduce costs and improve working capital. On average, CFOs seek an increase of 17% in payables and 15% in receivables executed electronically. CFOs realize that electronic payment technologies make good business sense: 4 out of 5 acknowledged the positive impact they are having on overall company performance. Electronic Payments Utilization Payables Receivables 54% 41% 39% 24% Current Wanted Current Wanted 6

A Measured Approach to Real-Time Payments CFOs are well aware of the impending real-time payment systems and the business benefits. Widespread implementation is likely to be delayed, though, as they are apprehensive about being among the first to market. About half of upper middle market CFOs and nearly two-thirds of lower middle market CFOs who plan to implement real-time payment systems are waiting for their peers to lead the way. Current Status When Implementation Will Occur Implemented Researched, planning to implement Researched, no plans for implementation 4% Among those who intend to implement after systems have been implemented by others 38% 30% Aware, but no research or planning Not aware 9% 19% 64% 49% Upper middle market >$500MM Lower middle market $25MM to <$500MM 7

Unlocking Value From Data Although some positive impact has already been felt, most CFOs believe they are not currently using big data to its potential. Upper middle market CFOs are further along, with the right talent and technology in place to realize a positive business impact, as compared to lower middle market CFOs who have not been able to leverage big data technology as much or as effectively. Current Impact of Big Data Upper middle market >$500MM 39% 48% 14% Lower middle market $25MM to <$500MM 20% 43% 37% Significant impact (10-8) Moderate impact (7-6) No impact at all (5-1) Ability to Utilize Big Data Have the right People 63% Have the right Technology 63% Upper middle market >$500MM 23% 23% Lower middle market $25MM to <$500MM 8

Technology Investments Will Accelerate Both upper and lower middle market CFOs believe the future impact of big data will be significant and both are planning to invest more to ensure success. Almost all upper middle market CFOs anticipate spending more on people and technology to drive an increased impact while about two-thirds of lower middle market CFOs plan to increase their investments. Expected Impact of Big Data Upper middle market >$500MM 59% 39% 2% Lower middle market $25MM to <$500MM 37% 48% 16% Significant impact (10-8) Moderate impact (7-6) No impact at all (5-1) Looking to Invest More in Next Three Years In People 20% 87% In Technology 93% Upper middle market >$500MM 61% 69% Lower middle market $25MM to <$500MM 9

AN INCREASINGLY EVOLVING ROLE Pace of Change Will Accelerate Continuous growth leads to a continuously evolving role, and CFOs expect the pace of this change to accelerate. While only 10% of CFOs experienced a significant change in their role over the past 3 years, twice this amount expect significant change in the next 3 years. Change in CFO Role In past 3 years 10% 64% 27% In next 3 years 21% 60% 19% Significant change (10-8) Moderate change (7-6) No change (5-1) As this evolution continues, CFOs will be expected to work collaboratively with their CEO across a broad range of strategic initiatives. While this expectation isn t new, what s surprising is that 29% of CFOs already spend as much time on business strategy as they do on financial tasks. Looking ahead, 58% of upper middle market CFOs feel confident in meeting this challenge compared to just 38% of lower middle market CFOs. Strategy and Financial Focus of CFOs Only financial 9% Mainly financial, some strategy 61% Equally on both 29% Mainly strategy, some financial 2% 10

Where CFOs are Focused Close to two-thirds of both upper and lower middle market CFOs are focused on the tasks that are necessary to keep their company properly financed, and more than half are focused on cash management to help optimize working capital. Upper middle market >$500MM Less focus çè More focus Corporate governance 42% 63% Investor relationships Human resources management 41% 55% International expansion Fraud prevention and monitoring 32% 52% Keeping the company properly financed Systems processing and information technology 32% 47% Cash management 43% Regulatory compliance Lower middle market $25MM to <$500MM Less focus çè More focus Corporate governance 42% 64% Keeping the company properly financed Mergers and acquisitions 36% 57% Cash management Systems processing and information technology 36% 57% Investor relationships Fraud prevention and monitoring 28% 39% International expansion 37% Regulatory compliance 11

METHODOLOGY Survey Population Profile of Survey Respondents CFOs of U.S.-based businesses with $25MM+ in revenue Manufacturing, construction, energy, pharmaceuticals (116); business and professional services (87); retail, hospitality, food and beverage (97) Total Completes Weighting and Representativeness N=300 CFOs Data were weighted to align with the national population of companies based on revenue group. Data Collection August 9, 2017 September 12, 2017 Survey Method Revenue 2017 $25MM to <$50MM 48% $50MM to <$100MM 25% $100MM+ 27% Phone and web-based survey; ~12-15 minutes in length; statistical significance at the 95% confidence level 12

CITIZENS COMMERCIAL BANKING Our experienced bankers and specialists understand the complexity of our clients business models. Whether you re a privately held company or Fortune 500 corporation, we have the expertise to assess your unique needs and financial operating requirements, and to offer tailored advice, ideas and solutions to help your business reach its potential. We deliver a full range of banking services, including: Commercial Financing Delivering financial flexibility for working capital, acquiring fixed assets, funding equipment leases or furnishing growth capital Capital Markets Bringing advice and access to debt and equity capital markets for restructuring, recapitalizations or corporate development Leveraged Finance Offering expertise and financing solutions for acquisitions, leveraged buyouts, recapitalizations and refinancings for both sponsors and corporations M&A Advisory Providing sell-side advisory, buy-side advisory, capital raising, financial valuations and restructuring services Global Trade Finance Offering services and tools to streamline international supply chain management and international cash management Currency & Interest Rate Risk Management Protecting the value of capital against inflation, rising interest rates and fluctuating exchange rates Treasury Management Creating solutions to optimize liquidity and streamline payables 13

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