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Yadkin's CRE concentration not a deal breaker

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery


Yadkin's CRE concentration not a deal breaker

's bankingsub was bumping up against the commercialreal estate loan concentration thresholds that could warrant , butthat didn't stop the company from fetching a highly valued sale price from F.N.B. Corp.

came very close at theend of the first quarter to crossing the CRE limits that regulators guide against.Banking regulators in 2006,and again in late 2015, advised banks to keep their commercial real estate loansbelow 300% of total risk-based capital when three-year CRE growth exceeds 50%, andto keep construction & land development loans, a component of CRE loans, below100% of total risk-based capital. Exceeding the thresholds is not against regulationsbut could result in increased scrutiny,and regulators are reportedly encouraging some banks who cross the threshold toraise capital. Regulators define CRE loans as: construction & land developmentloans, multifamily loans, nonowner-occupied nonresidential property loans, and commercialreal estate loans secured by collateral other than real estate.

Basedon Yadkin Bank's first-quarter call report, total CRE loans were up to 289.7% ofcapital, growing steeply after its recentbank acquisitions, including the March 2016 purchase of Greensboro, N.C.-based . Yadkin Bank's C&Dloans were also up to 98.7% of total risk-based capital. The banking unit has notyet released its second-quarter call report, but Yadkin Financial released for theholding company July 21. It reported that total risk-based capital as a percentof risk-weighted assets had increased in the second quarter, so it's possible theCRE concentration levels have declined. The company did not disclose granular loan-typedata in its earnings release; updated CRE levels will be revealed when Yadkin Bankfiles its call report, which is due July 30.

F.N.B.also said in an investor presentationthat the combined company had a "pro forma CRE concentration comfortably belowregulatory guidance." F.N.B's CRE loans totaled just 179.4% of total risk-basedcapital, as of March 31, and its C&D loans were 35.7% of capital.

A newsreport that Yadkin Financial was exploring a sale surfaced May 25, about a month after the company filed itsfirst quarter call report, but CRE exposure may not have prompted the bank to sell.As reported by S&P Global, Yadkin has longbeen considered a takeout candidate as it approached $10 billion inassets by swallowing up North Carolina community banks.

Still,the company's CRE levels could have limited its potential buyer list, as it didfor Riverhead, N.Y.-based Suffolk Bancorp,which recently announced a sale to Bridgeport, Conn.-based People's United Financial Inc. A merger background subsequently revealed that Suffolk Bancorp'shigh CRE levels, and subsequentgrowth limitations, figured heavily in its decision to sell. The filing also disclosedthat certain unidentified interested buyers would not have been able to consummatea transaction with Suffolk Bancorp because their CRE levels were also high. It shouldbe noted that Suffolk Bancorp's CRE loans were well above the thresholds, at over400%.

Yadkin'sbuyer F.N.B. said it considered CRE exposure as it explored targets down south,noting that heavy CRE is one of the reasons it avoided Virginia banks. During theconference call to discuss the merger, F.N.B. CEO Vince Delie, said, according toa transcript, that banktargets in the state of Virginia were overvalued, especially given their CRE exposure,which he described as "well above 300%." S&P Global Market Intelligenceidentified 14 banks and thrifts in the state that met or exceeded regulators' concentrationguidance criteria compared to a total of 92 institutions in Virginia.

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But YadkinBank's brush with the CRE concentration thresholds certainly did not depress thesize of the offer it secured. S&P Global valued F.N.B.'s all-stock purchaseprice as $1.48 billion, or 231.8% of tangible common equity. The only bank targetsince 2009 in the Carolinas with a higher price-to-tangible book value at announcementwas Durham, N.C.-based Square 1 FinancialInc., which sold to PacWestBancorp in 2015 for $847.41 million, or 262.5% of tangible common equity.Since the beginning of 2015, target banks headquartered in either North Carolinaor South Carolina have sold for a median of 147.4% of tangible common equity.

The lastbank deal target in the Carolinas that was a comparable size to Yadkin Financialwas Columbia, S.C.-based First CitizensBancorp. Inc., which had $8.3 billion in assets whenit sold to Raleigh,N.C.-based First Citizens BancSharesInc. in 2014. First Citizens Bancorp was valued at just 118.3% of tangiblecommon equity, at announcement.

The F.N.B./Yadkindeal is also large and expensive when compared to bank M&A across the U.S. Itranks as the seventh-largest deal in the country since the beginning of 2015, aswell as the seventh-most expensive.

Yadkin Financial is one of the largest community banks in NorthCarolina and one of only three banks in the state between $5 billion and $10 billionin assets. After megabank Bank of AmericaCorp. at No. 1, superregional bank BB&T Corp. at No. 2 and regional bank First CitizensBancShares with $32.2 billion in assets, only Charlotte, N.C.-based with $7.6billion in assets is larger than Yadkin Financial.

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Click here to see S&P Global Market Intelligence's latest analysis of CRE concentration among banks and thrifts at the end of the first quarter.

Bank and thrift M&A trends can be analyzed by clicking here. Select the filter to narrow the analysis by industry and geography.