The chief executive and president of F.N.B. Corp. of Hermitage, Pa., said it created a merchant-banking subsidiary because he was tired of turning away business.
Too many times, Stephen J. Gurgovits said, the $5.7 billion-asset parent of First National Bank of Pennsylvania has had to refer software companies or small manufacturers to an outside investment bank, because F.N.B. considered their loan requests too risky. Often these companies have deposit or small-loan relationships with F.N.B.
"In some ways, we were admitting to customers that we couldn't handle all of their needs," Mr. Gurgovits said in an interview last week. "The need for this business has existed for some time."
F.N.B. Capital, the subsidiary that was founded Oct. 21, will offer subordinated debt, private equity, and other specialized financing options to small and midsize companies that do not qualify for bank loans.
Instead of making a collateralized loan, merchant banks typically provide operating capital by taking a private equity stake in a company or investing in subordinated debt.
Andrew Borrmann, an analyst with SunTrust Robinson Humphrey in Atlanta, said it is unusual for a community banking company to get involved in merchant banking. Though he agreed that F.N.B. Capital plugs a hole in the company's product line, he said there are valid reasons few community bankers are in the business.
For one thing, Mr. Borrmann said, F.N.B. Capital's deals would be rated a few notches below bank credits; essentially, the deals would be subprime debt. Also, merchant banking would make F.N.B. Corp.'s earnings "lumpy" - a quality analysts and investors dislike - since the business is inherently unpredictable, he said.
Stephen J. Gurgovits Jr., the CEO's son, who had been a vice president and portfolio manager of the wealth manager F.N.B. Investment Advisors, was appointed to run the new unit's day-to-day operations.
F.N.B. Capital will focus on small and midsize companies with annual sales of $100 million or less, Mr. Gurgovits Jr. said; the typical deal's size will range from $1 million to $5 million.
Most merchant banks ignore the needs of smaller companies, because their deals are not as profitable as those for large companies, so F.N.B. Capital would be filling a ready-made niche, he said.
Even so, he said he intended to start slow; the unit will not start making deals until next year. In the meantime, Mr. Gurgovits Jr. and F.N.B. Capital's in-house analyst - the unit's only two employees so far - will spend their time studying prospective customers and analyzing potential deals.
Mr. Borrmann, who has a "buy" rating for F.N.B. Corp.'s stock, said that if the unit hits it big, it can generate huge gains, but if a deal goes bad, the fallout can easily ruin a quarter.
F.N.B. might be better off using the capital it plans to invest in the unit to further its growth in the Pittsburgh market, where it acquired a $536 million-asset bank last year, or in Florida, where it recently announced plans to open a series of commercial and residential-mortgage loan production offices, he said.
"Be more effective doing what you do," Mr. Borrmann said. "F.N.B. could do a lot of banking in Pittsburgh or Florida."
Mr. Gurgovits Sr. said that his company considered the downside before venturing into merchant-banking, but he said those risks were outweighed by the need to stop referring promising customers to third-party vendors.
"It put the banking relationship at risk," he said.
He recounted one example, involving a software company that was being acquired by one of its three original founders.
F.N.B. had handled the company's borrowing needs, but they had been relatively small, he said. The acquiring partner needed a large sum of money, but the only collateral he had to offer was the company's intellectual capital.
Clearly, it was not the type of loan that appeals to a community banker, and Mr. Gurgovits Sr. reluctantly referred the company elsewhere. He declined to say which lender got the deal, though he did note a little ruefully that it reaped about an 800% return on its investment.
Many of the customers F.N.B. Capital will handle will resemble the software company - family-owned or privately held companies trying to finance buyouts or inter-generational transfers, he said. It would also fund companies seeking to make acquisitions, as well as those dealing with extremely rapid growth, he said.
F.N.B. Capital will have its own board. Its chairman will be John W. Rose, who sits on F.N.B. Corp's board and runs the Hermitage private investment bank McAllen Capital Partners Inc.
Mr. Gurgovits Jr. said he would rely on F.N.B. Capital's board for help in analyzing individual transactions and to refer deals. At first, though, the biggest source of business would be the parent company's more than 60 commercial lenders, who will now be able to route the deals they cannot finance to the unit, he said.
It is also expected to boost F.N.B. Corp.'s expansion in Pittsburgh.
