F.N.B.'s Refuels, But Where (and What) Will It Buy Next?

A large portion of F.N.B.'s new capital will help it remodel an increasingly growing house, and the rest could go toward expanding its size even more.

The $12.8 billion-asset company has several reasons for raising $150 million, split between common and preferred stock. When the company hits $15 billion in assets, regulators will begin treating its trust-preferred shares as Tier 2 capital.

The Hermitage, Pa., company will use some of its newly raised capital to retire $131.5 million in trust-preferred securities. The remaining funds could fuel acquisitions.

F.N.B. has been on a bit of a tear this year, completing two acquisitions with another set to close in early 2014. Future deals are a matter of when, not if, analysts say. Exactly how that will play out is debatable, though.

F.N.B. is among a group of community banks with a highly valued currency — its stock traded at 257% of book value before it unveiled the capital raise — and there is an expectation that banks in this group will look to bulk up while they can.

"There is pressure to strike while the iron's hot," says Jason O'Donnell, an analyst at Merion Capital. "There is a growing perception that, for banks like F.N.B., the [M&A] strategy hinges on their ability to trade at a price multiple north of two times."

F.N.B.'s latest deals have, for the most part, been relatively small and have involved out-of-market banks. The idea is to get a beachhead beyond Pennsylvania and then recreate those operations in F.N.B.'s image.

"The smaller scale of these recent acquisitions is lower risk," Vince Delie, F.N.B.'s president and chief executive, said during an Oct. 18 conference call to discuss quarterly results. "This is by design and allows us to strategically enter these markets, build a presence and significantly enhance our organic growth prospects."

Transformational deals — where a seller's asset size is at least half that of the buyer's —have become the rage, and analysts have raised the prospect for F.N.B. Frank Schiraldi, an analyst at Sandler O'Neill, wrote in an Oct. 18 note to clients that the company's deals so far have not moved the needle significantly.

"If it were to do a transformative deal this could be a meaningful positive to the story," Schiraldi wrote. While "there are a couple of names that would fit that bill, unfortunately it is difficult to measure the potential for this to occur."

Schiraldi was unable to comment further because his firm was involved with F.N.B.'s capital raise. Other analysts say the new capital increases the possibility of larger deals for F.N.B.

"They've got the capacity to do smaller, whole bank deals," O'Donnell says. "There are probably 50 institutions that are potentially fair game in the mid-Atlantic and Ohio. The big advantage, though, is that [the capital] gives them the capacity to do larger deals. They don't need to, but they can."

"We continue to look for opportunities that will enhance shareholder value," Delie said during F.N.B.'s conference call. "We continue to look for situations where we can take costs out and benefit from being in higher-growth markets."

F.N.B. is higher levered than most banks. At Sept. 30, the company's tangible common equity ratio was close to 6%, and it will be close to 6.5% after its capital moves. The ratio is not a regulatory benchmark, but analysts typically like to see that ratio approach 7%.

Since the 2008 financial crisis, regulators have focused on tangible common equity. Analysts say that regulators may have suggested that F.N.B. bulk up its cushion before pursuing more deals.

"Maybe this capital raise suggests that they are getting some regulatory pressure to slow it down," says David Darst, an analyst at Guggenheim Partners. "The positive thing for FNB is that they can run with a little bit more leverage... but they are not immune to regulatory pressures."

All of this is speculation, of course. Still, John Moran says the common equity component of the deal reminds him of May 2011, when F.N.B. raised $63 million in common equity. A month later, it agreed to buy the $1.8 billion-asset Parkvale Financial in Monroeville, Pa., for $130 million, or 195% of the seller’s tangible book value.

"At the time, I didn't think much of it," says Moran, an analyst at Macquarie. "But they had their deal soft-circled and pre-emptively got in front of it. I would not be surprised if something like that happens."