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TriCo touts bank deal in San Francisco, but investors recoil on cost

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TriCo touts bank deal in San Francisco, but investors recoil on cost

TriCo Bancshares trumpeted its planned acquisition of FNB Bancorp as a prime way to enter coveted San Francisco with added scale, and its chief executive said the target carries scarcity value in a market flush with lending opportunities.

TriCo President and CEO Richard Smith said in an interview that greater San Francisco is ripe with small and midsize businesses that are borrowing to expand as they support or work alongside a roaring technology industry — from small manufacturers to construction subcontractors. He said that, with the acquisition, TriCo will be well-suited to compete for these commercial clients.

"We clearly get great growth opportunities," Smith said.

Investors, however, balked at the $315 million price tag and the tangible book value dilution that accompanies it, sending shares of TriCo down more than 3% in Tuesday morning trading, the first session after the Chico, Calif.-based buyer announced the all-stock deal late Dec. 11.

"You have to pay a pretty penny to get into San Francisco," James Bradshaw, a West Coast bank analyst at investment adviser Bridge City Capital, said in an interview. Investors "are surely making note of the price, and TriCo has mostly been in smaller markets, so this deal marks somewhat of an alteration to their strategy, and that represents new risk to investors."

SNL Financial valued the deal at 259.9% of tangible book value on a per-share basis. SNL valuations for bank and thrift targets in the West region between Dec. 11, 2016, and the same date this year averaged 182.88%. On a TBV basis, the FNB Bancorp deal ranks among the 10 most expensive announced since the start of 2016, based on an S&P Global Market Intelligence analysis published this week.

TriCo estimated initial TBV dilution at 6.6%, and the bank projected it would take 4.7 years to earn that back after the deal's expected closing in the second quarter of 2018.

Bradshaw noted that investors typically favor earnback periods shorter than four years. But, he added, bank M&A in San Francisco is unique and pricing typically should not be compared directly to deal-making in the West or nationally. He said the market is one of the most prosperous in the country, and he echoed Smith in noting that it is fueled in large part by a fast-growing technology industry that shows no signs of receding.

"I'm not crazy about the price" or the earnback period, Bradshaw said. "But it is very difficult to enter San Francisco, so it makes sense that they have to pay up to get into it."

Timothy O'Brien, a Sandler O'Neill & Partners analyst who covers TriCo, noted to clients in a report that South San Francisco-based FNB Bancorp's network of 12 branches extends south from San Francisco to the Silicon Valley area — prime territory for loan demand.

That is important for TriCo, a bank whose nearly 70 branches span much of central California on up to the far northern reaches of the state, covering several markets that are deposit-rich but slower in growth and loan demand than the Bay Area. Moving into San Francisco, he said, should enable TriCo to deploy more of its deposits into loans and ramp up interest income. He noted that, at the close of the third quarter, TriCo's loan-to-deposit ratio stood at 74%; that compared to 80% for FNB Bancorp.

"So simply boarding the FNB loan book (with a comparable yield to TriCo's of 5.2%) should immediately benefit the bottom line," O'Brien wrote.

The Sandler analyst also noted that "there are only a handful of sizable, independent community banks still operating in the Bay Area market, and of these, FNB is one of the largest remaining," adding to its worth as a target.

"To the degree that TriCo can make this deal fit culturally as well as financially, we think it could serve as a good springboard to make additional acquisitions in the market," O'Brien said.

TriCo CEO Smith said the company, in the near term, is focused on the FNB deal. He said that the combination of San Francisco's vibrancy and the scarcity of community bank takeout targets in the market did give FNB "some added value."

TriCo also said it expects the merger to generate cost savings of about 28% of FNB's noninterest expense base. The savings would help drive anticipated 2019 earnings accretion of 8%.

After acquiring FNB's roughly $1.3 billion in assets, $800 million in gross loans and $1.0 billion in deposits, TriCo would have about $6.1 billion in assets, $3.7 billion in loans and $5.0 billion in deposits.

"You can't build that from scratch" in San Francisco, Smith said.

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