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Investors wary of F.N.B.'s big leap into North Carolina with Yadkin deal

Pittsburgh-based F.N.B. Corp.'s to acquire Raleigh, N.C.-basedYadkin FinancialCorp. would move it into coveted, high-growth markets, while alsoproviding diversification and boosting it to nearly $30 billion in assets. Butinvestors balked at the geographic jump and took note of the 4.5 years that thebuyer estimated it would take to earn back dilution to tangible book value.

Shares of F.N.B. sank more than 8% in morning trading July 21after the $1.4 billion all-stock deal was announced. Shares of Yadkin fell morethan 3%.

"Clearly,people are not happy with them making the leap," Matthew Shields, a bank stock trader and managing director in Hovde Group'sequity capital markets group, said in an interview. F.N.B. currently operatesabout 330 branches across Pennsylvania, Ohio, Maryland and West Virginia — statesthat do not border the Carolinas. Yadkin hasabout 100branches across North Carolina and upstate South Carolina.

Shields said investors also viewed the projected earnback period "as being toward thelonger end of what is tolerated," noting that anything approaching fiveyears often elicits concern and that investors tend to prefer four years orfewer.

In a presentation, F.N.B. also estimated that the deal wouldyield savings totaling 25% of Yadkin'snoninterest expense base. At first blush, that does not stand out as a lofty figurebased on bank M&A activity in recent years. But Shields noted that, withoutoverlapping branches between the two companies —branch consolidation is typically a key driver of deal savings — investors arelikely nervous about F.N.B.'s ability to quickly take out costs.

The price tag also was relatively high. S&P Global MarketIntelligence estimated the deal value topped 230% of tangible book. Valuationsfor bank and thrift targets in recent years have not typically exceeded 200% oftangible book.

"Itdoes look like they had to pay up for this one," Thomas Rudkin, a FIG Partners investment banker who is active in the Southeast,said in an interview.

Allof that noted, Rudkin said, geographic diversification could prove a boon forF.N.B. Its current footprint is heavily populated and peppered with large metroareas. But much of its territory is not advancing as quickly as several bigmarkets in North Carolina, he said, in terms of population growth and accompanyingeconomic expansion.

"Thiswould get F.N.B. into a high-growth area, and it gets them in with significantsize and market share," Rudkin said.  

Yadkin, with more than $7 billion in assets, has top 10market share positions in large North Carolina markets such as Raleigh,Charlotte and Wilmington — all markets where population growth between 2010 and2016 topped 9%, according to F.N.B.'s presentation.

YadkinPresident and CEO Scott Custer did notimmediately return a call. Yadkin Chairman Joseph Towell referred comment toF.N.B., where an executive could not immediately be reached. The buyer isslated to discuss the deal with analysts at 2 p.m. on July 21.

Inits presentation, F.N.B. noted strong commerciallending potential in Yadkin's markets — potentialit intends to capitalize upon by offering customers the wider array of productsthat a larger bank can provide.

The deal is expected to close inthe first quarter of 2017. F.N.B. estimated that the acquisition would be accretive to GAAP EPS by 5.5%in 2018.

Shieldsagreed with Rudkin that the merits of the deal are substantial and likely wereoverlooked by many investors. "I think the initial reaction is anoverreaction," Shields said ofthe hits to the stocks.