F.N.B. Corp. in Pittsburgh is taking a big plunge into North Carolina.
The $21 billion-asset company agreed on Thursday to buy Yadkin Financial in Raleigh, N.C., for $1.4 billion. The deal, the industry's third-largest of this year, also has the biggest premium — 2.23 times the seller's tangible book value — thus far in 2016.
F.N.B., in exchange, will pick up a bank with branches in all major North Carolina markets, essentially gaining coast-to-mountains coverage in the state without stringing together a number of smaller deals. With $7.5 billion in assets, Yadkin is also the second-biggest community bank in North Carolina. (Capital Bank Financial in Charlotte, N.C., which has an acquisition pending, is nearing $10 billion in assets.)
"Yadkin is one of the crown jewels of North Carolina," said Brady Gailey, an analyst at Keefe, Bruyette & Woods. "It has decent scale and is in all of the hottest markets. They have created a pretty impressive franchise."
F.N.B. also showed that it was willing to leapfrog Virginia to enter North Carolina. This decision was deliberate, Vincent Delie, F.N.B.'s president and chief executive, said during a conference call Thursday to discuss the merger. Management decided that the prices for banks in Virginia were too high and many potential targets there had too much exposure to commercial real estate, he said. Still, F.N.B. will likely revisit Virginia should prices settle down.
F.N.B.'s management had created a scorecard that looked at several factors, including the competitive environment, opportunities for commercial-and-industrial loans and demographics before coming up with a list of the top 50 markets across several regions. Raleigh and Charlotte both had very high scores, Delie said.
North Carolina has strong demographics and an economy that has proven to be more stable and less boom-and-bust than other Southeastern states, industry experts said.
Yadkin's metro markets have had roughly 7% population growth since 2010. Markets served by F.N.B. have had stagnant growth over that time, according to a presentation tied to the deal announcement. North Carolina "consistently ranks as one of the best business climates in the U.S." because of its corporate tax rate, low business costs and availability of skilled labor, the presentation noted.
Pittsburgh "has suffered economic degradation with the loss of big steel and major airline hub," said David Powell, president of the consulting firm Vitex.
With that in mind, the deal has several similarities to PNC Financial Services Group's 2012 purchase of RBC Bank, which was also based in Raleigh. At one point RBC was run by Scott Custer, Yadkin's current chief executive. Yadkin also has a big builder finance business, which was a key part of RBC's model under Custer's leadership.
The deal will push F.N.B. to $30 billion in assets, giving it enough heft to compete more effectively with some of North Carolina's biggest players, particularly when it comes to serving midsize businesses. The state is home to Bank of America and BB&T, while Wells Fargo, PNC and SunTrust also have operations there.
"There used to be dozens of banks in the $20 billion to $50 billion-asset category that could have great relationships with the midsize businesses," said Lee Burrows, chief executive of Banks Street Partners. "Those have all evaporated. F.N.B. plans to slot itself into that spot."
The sale ends another narrative tied to the financial crisis.
Custer co-founded Piedmont Community Bank Holdings shortly after leaving RBC in 2009. With funding from firms such as Stone Point Capital and Lightyear Capital, Custer packed on nearly $7 billion in assets with six bank acquisitions, including this year's purchase of NewBridge Bancorp in Greensboro, N.C.
Private equity typically looks to exit investments over a five- to seven-year time frame, which could explain the timing of the sale, industry experts said. Yadkin was also nearing the $10 billion-asset threshold where interchange fees, stress testing and other regulatory constraints kick in.
F.N.B.'s execution will be watched closely; the company only plans to cut a quarter of Yadkin's operating costs. In addition, Yadkin represents a third of F.N.B.'s current asset size.
Yadkin, meanwhile, had yet to integrate NewBridge, which could create some upheaval and opportunities for other banks to pick off clients, industry experts said.
Still, F.N.B. is an experienced acquirer, having brought a dozen banks since 2005, and it should be able to handle the transition, said Chris Marinac, an analyst at FIG Partners.
Management at F.N.B. and Yadkin assured analysts during Thursday's call that they would be able to retain key employees during the transition. Custer and Steven Jones, Yadkin's chief banking officer, have agreed to stay. Custer, meanwhile, pointed to Yadkin's performance as proof that the company has been able to do well despite uncertainty from past acquisitions.
"We've got the ability to attract people, to retain good talent," Custer said. "I'm 100% convinced that … quality people will stay and be a part of F.N.B. North Carolina going forward."
Additionally, F.N.B. argued that the deal was less risky than buying a smaller institution because Yadkin, had demonstrated that it was an experienced acquirer. The deal also made sense for F.N.B. because it adds scale to deal with regulatory and economic pressures.
"There are people that are actually capable of helping us take it through the closing and conversion," Delie said. "That doesn't exist in smaller banks. … We're facing flat interest rates and a stringent regulatory environment that is likely to continue. We need to have scale, and many of the costs we have incurred to maintain and build our risk management systems are fixed costs. It needs to be spread out over a larger base."
North Carolina, meanwhile, could see more disruption should other banks look to enter the state. There are other big community banks based there, including Capital and BNC Bancorp, that could factor into future consolidation.
"It still matters that more people are moving to the South than the North," Marinac said. "It still matters that it is cheaper to do business in the Carolinas and that there is ample housing. I think it is a market that is very vibrant."