Another Banking Merger to Defend Against the Big Competitors

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In late February, Hermitage, Pennsylvania-based FNB Corp. (NYSE: FNB) announced that it would acquire Solon, Ohio-based PVF Capital (NASDAQ: PVFC) in an all-stock deal valued at over $100 million. The deal would create a moderate-sized regional bank with a significant presence in the Pittsburgh and Cleveland metro areas, as well as in several smaller industrial cities between them.

The merger is the latest transaction that involves beaten-down banks in an economically challenged region of the United States. Consumer-focused banks that operate in northeastern Ohio and western Pennsylvania were disproportionately affected by the recent recession and continue to deal with bad-loan burdens and other financial problems.

As such, this deal could provide the combined company with the heft that it needs to compete with encroaching national players like PNC Bank and Bank of America (NYSE: BAC). The market value of the combined company will not come anywhere close to the size of Bank of America ($1.7 billion MV vs $130 billion MV), but they may be able to fight regional battles. The combined company will have percentage sales growth in the double digits, while Bank of America lost 20% of its sales in the last year.  If nothing arises to delay or stop the proposed merger, this transaction could take place by the end of the second quarter of 2013.

About FNB and PVF Capital

FNB Corporation operates a number of retail and business-focused bank branches in the "Rust Belt" region between Pittsburgh and Cleveland. The company deals primarily with retail borrowers as well as small local businesses. Its offers a full suite of loan products and other financial services, including mortgages, savings vehicles, wealth management plans, business loans, refinancing options, home equity loans and more. FNB also operates a full-service insurance division that sells health, life, accident and title insurance plans. Its branches do business under the "First National Bank of Pennsylvania" name. In 2012, the company earned $110.4 million on gross revenues of about $473 million.

PVF Corporation owns and operates Park View Federal Savings Bank. Under this trade name, the company does business as a savings-and-loan institution in the southern and northeastern suburbs of Cleveland. In addition to customer-focused services like deposit accounts and wealth management plans, the company also makes mortgage and real estate loans to private borrowers and developers. Both Park View Federal Savings Bank branches and PVF's commercial loan offices issue commercial and personal loans for a variety of uses. The company also manages a small land investment division that buys and sells property in its trade area. The company earned $5.5 million on revenues of $31.8 million in 2012.

How the Deal Is Structured

Under the terms of this deal, PVF shareholders of record on a yet-to-be-determined date will receive exactly 3.405 FNB shares for every 10 PVF shares that they own. At FNB's current share price, this pegs the value of each PVF share at approximately $3.91 per share. Relative to PVF's current share price of $3.70, this represents a premium of 5.7 percent.

Complications and Legal Issues

As is customary for mergers of this type, the proposed deal between FNB and PVF is subject to full votes by PVF's shareholders and board of directors. It is unclear when these votes will take place. In addition, the deal is likely to be scrutinized by the appropriate financial regulators. Due to the small size of the two parties, this regulatory approval process should be cursory.

There are some pending legal issues that may serve to delay or complicate the deal. In mid-2007, another bank offered to purchase PVF for about $131 million dollars. This represents a premium of nearly 30 percent to the current offer price. Although the deal was eventually voided when the other party backed out without explanation, the memory of the "almost-buyout" has lived on in the minds of the company's shareholders. The comparatively low valuation of the current proposal is due primarily to the fact that economic conditions have worsened measurably since 2007.

This is the gist of a pending legal investigation of the deal. Since such investigations are quite common in advance of "low-balled" deals, this action should not cause PVF shareholders to panic. However, investors who wish to play this transaction for the decent arbitrage premium that it offers should be aware that they may expose themselves to significant downside risk as a result of the ongoing investigation. At the same time, it is relatively unlikely that this deal will not go through as planned.

Long-Term Prospects and Outlook

Assuming that this transaction does take place, the combined company will be in a solid competitive position. In a broader sense, it may also benefit from economic tailwinds within its trade area. While the Rust Belt region has been shedding jobs and losing population for years, there are plenty of reasons to believe that its fortunes have finally shifted. Specifically, the Pittsburgh area has become an incubator for medical technology and cloud-computing start-ups. Meanwhile, Cleveland's real estate crash has created tremendous investment opportunities in the city and its inner suburbs. The combined company could well benefit from an increasing number of loan prospects in these three industries.

In short, the proposed merger between FNB and PVF offers an arbitrage opportunity of better than 5 percent and may be attractive for long-term investors as well. With a dividend yield of over 4 percent and a stable loan portfolio, FNB is a classic buy-and-hold stock. In the coming years, it may reward investors who jump in at these levels.


Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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