Going outside their core market, as F.N.B. (FNB) is doing with its deal for a Maryland bank, has gotten some banks in trouble.
In fact F.N.B., of Hermitage, Pa., ran into problems when it dove into the Florida real estate market shortly before the financial crisis.
Its executives hope history does not repeat itself in their latest venture. The $12 billion-asset F.N.B. would acquire the $437 million-asset Annapolis Bancorp (ANNB) in an all-stock deal. The $51 million agreement is expected to close in April.
Many companies have decided to stick close to home to boost market share. U.S. Bancorp (USB) and Fifth Third (FITB) executives have said in the past year that they would rather build density in existing markets instead of spreading themselves too thin.
But there are a lot of reasons to like F.N.B.'s foray into foreign territory this time, says Macquarie Capital analyst John Moran.
The Annapolis deal "is a fairly low-risk way to get into an attractive market," Moran says. "It's not a swing-for-the-fences kind of deal."
Then there is the opportunity that Annapolis offers for loan growth—something that is in short supply in much of F.N.B.'s home base in western Pennsylvania.
"Their core markets are a little slower growing," Moran says. "They probably have a better opportunity on the deposit side in Pennsylvania than on the asset-generation side. They'll need to put that money out some place."
Located halfway between Washington and Baltimore, the Annapolis market includes the sprawling Fort George G. Meade base, which as headquarters for the U.S. Cyber Command directs efforts to combat attacks on U.S. computer networks.
"Given what we're hearing with North Korea and China investing heavily to conduct cyber attacks, I would expect that line item in the [U.S. military] budget to continue to grow," Vince Delie, president and chief executive of F.N.B., said during a conference call Tuesday to discuss the deal and third-quarter earnings.
Specifically for F.N.B., the opportunity comes in the form of technology companies relocating to the Annapolis area, Delie says.
"What's really driving the local economy there are businesses relocating to support Cyber Command," he said during the conference call.
Delie could not be reached for additional comment.
Fort Meade also houses numerous other federal civilian agencies and military outposts, and as a result of the 2005 Base Realignment and Closure program, the fort is projected to house as many as 60,000 workers by 2015, according to F.N.B. It currently has 40,000.
Because of that opportunity for commercial lending, the acquisition of Annapolis Bancorp, the holding company for BankAnnapolis, should not create the same problems for F.N.B. as Florida did, Moran says. F.N.B. entered Florida in 2006 and has worked for several years to improve its credit quality by shrinking its commercial real estate portfolio there. In March 2009 F.N.B. had a $302 million loan portfolio in Florida, of which about 32% was foreclosed real estate and nonperforming loans.
The Annapolis deal also offers a blueprint for other banks in merger negotiations, in the event they disagree on an element that threatens to derail the entire effort. While conducting due diligence, F.N.B. and Annapolis could not agree on the value of a large loan still on Annapolis' books. F.N.B. decided to offer Annapolis shareholders an additional cash consideration of up to 36 cents per share depending on the seller's ability to resolve the loan.
"We agreed to permit some upside," Delie says.
Price-adjustment features have been used by other banks, including Old National Bancorp (ONB) in its deal for Indiana Community Bancorp, to save a transaction from a collapsing over one disagreement, Moran says.
"For folks willing to look at a deal creatively, it's a way to say, 'You think this loan is worth more than we say, then prove it to us and we'll give you a better price,'" Moran says.
Aside from loan growth and the innovative price-adjustment feature, F.N.B. could also use Annapolis as a launching pad in the Baltimore-Washington area. Although Delie did not say another deal was imminent, he says there are about 20 banks in the market, between $500 million and $3.5 billion of assets, that F.N.B. could view as an acquisition target. There are lenders who work at other banks in the market that F.N.B. could try to hire, he adds.
"Long term, there are lots of opportunities to expand in that market," Delie says. "Short term or intermediate term, we have a good platform to leverage."