Pennsylvania-based FNB faces challenges in N.C. expansion
By David Dykes
When it paid $1.8 billion last year for Yadkin Financial Corp., Pittsburgh-based F.N.B. Corp. emphasized a desire to expand beyond slower-growth Northern markets in favor of faster-growing North Carolina. By jumping over Virginia, where it doesn’t have offices, FNB violated an unwritten industry rule that the smartest expansions occur in adjoining territories.
A year later, it’s evident FNB is experiencing growing pains on its trek south. In the first quarter this year, loans in the Charlotte and Triad regions grew by less than 10%, and there was negative growth in the Raleigh-Durham area, CEO Vincent Delie Jr. said in an April conference call with analysts. Meanwhile, FNB’s main northeastern markets including Cleveland and Baltimore mostly grew by 10%, outpacing parts of North Carolina where the population and job growth are soaring.
Don’t make too much of a single quarter’s results, bank spokeswoman Jennifer Reel notes. FNB has shown lots of staying power since the bank opened in 1864 in northwest Pennsylvania, building itself into a multistate business. Much of the growth has occurred since Delie, a former National City Bank executive, joined FNB in 2005 and became CEO in 2012. Assets have tripled since 2009 after more than a dozen acquisitions in that period.
But Raleigh-based Yadkin was FNB’s biggest bite, and other signs suggest a sluggish start, a common situation when a bank enters a new market. Shares have slumped more than 11% in the last year, while four of Yadkin’s five highest-paid executives in 2017 have departed, including former CEO Scott Custer and Chief Banking Officer Steve Jones. Custer left shortly after the March 2017 merger to join Wilmington-based Live Oak Bank, while Jones departed 13 months later. In a statement, Jones called FNB “a great company that truly cares about its employees and the community. I enjoyed working with the entire FNB team.” He declined further comment.
“When you’re coming into a new market and you’re implementing a new model, there’s just going to be some transition time that you have to go through,” says Custer, who joined Live Oak as president and is moving into another senior leadership post this fall. FNB must find its identity between larger institutions and smaller community banks, he adds. “They’re sort of like Goldilocks — they’re not too big and not too small.”
Delie, 53, is confident the bold move into North Carolina was prudent despite competition from entrenched rivals including Bank of America, Wells Fargo and BB&T, and regional competitors such as SunTrust, Regions and First Tennessee. With assets of about $31 billion, FNB is a fraction of the size of the big U.S. megabanks and large regionals, but Delie notes it has competed effectively with BofA, Wells Fargo and Pittsburgh-based PNC Bank in the Northeast. “We feel that our formula provides borrowers with an option that is beneficial to them relative to banking with larger institutions,” he says.
North Carolina has been a notoriously difficult market to crack for out-of-state banks, most notably Royal Bank of Canada’s entry into the region after its 2001 purchase of Rocky Mount-based Centura Bank. After years of effort, PNC bought the RBC assets in 2012.
“We had a state that was dominated by legacy banks that were headquartered here, that were strong and had a lot of customer loyalty,” says Tony Plath, a professor of finance at UNC Charlotte.
Yet, FNB faces a different environment after about a third of the state’s 30 largest banks were acquired in the last three years. “The old-fashioned legacy-bank loyalty that used to exist in the state that made it hard for out-of-state entrants into North Carolina to succeed has kind of gone away,” Plath says.
FNB’s stock-market performance has lagged compared with peers that have recently expanded in North Carolina, as earnings per share increased by less than 2% annually over the last five years. Through early May, FNB shares gained 3.5% over the last two years. In that same period, Nashville-based Pinnacle Financial Partners, with $22 billion in assets as of Dec. 31, gained 38%, and Southern Pines-based First Bancorp jumped 96%. Pinnacle acquired High Point-based BNC Bancorp last year, while First Bancorp has $5.5 billion in assets after acquiring banks in Greensboro and Asheville.
Delie raised some eyebrows in his April conference call by declaring FNB’s prospects in Charlotte as favorable to Raleigh, where Yadkin’s key executives lived. “That doesn’t mean it’s not a good market. It’s a great market,” Delie told analysts, referring to the state capital. “We should start to see some growth there as well. But I think Charlotte, in my estimation for us, is a much better market.”
Either way, FNB is putting a big stake in the state’s two biggest cities by taking naming rights for new downtown office buildings. In March, the bank said it would be a prime tenant for the 31-story FNB Tower-Charlotte, a mixed-use building to be developed by Dominion Realty Partners on South Graham Street. That followed the May 2017 announcement of plans to be the anchor tenant of FNB Tower, a 22-story office and residential high-rise on Raleigh’s Fayetteville Street. Construction kicked off in early May for the Raleigh project, which is a partnership of Dominion and New York Life Insurance Co., says Dominion CEO Andy Andrews. Details for the Charlotte building remain in flux, with a groundbreaking slated for fall.
Discussions about the leases started when Custer was Yadkin’s president, then continued with Delie after the takeover, Andrews says. “Having a $30 billion bank anchor your office building is not such a bad thing.”
Yadkin’s desire to sell itself was one of the worst-kept secrets in North Carolina banking. Custer, a former top executive at RBC’s U.S. banking business, and Raleigh investor Adam Abram started assembling a bank in 2010. Over the next seven years, they bought seven N.C. banks, most of them struggling with recession-era credit issues, building assets to $7.5 billion and deposits to $5.1 billion. Bank regulations adopted since the 2009 financial crisis add significant costs once a company hits $10 billion in assets, so Yadkin concluded that selling to a larger company made more sense than further expansion on its own.
The buyer, however, was a surprise, because FNB had little brand awareness in North Carolina and had to outbid rivals with in-state operations, who could have reaped bigger cost savings from a merger. In announcing the deal on July 21, 2016, FNB said the acquisition would stunt its book value for more than four years, prompting its shares to decline 9% that day.
“Custer cobbled together this franchise precisely to be able to market it to an out-of-state bidder that would pay a handsome premium to gain access to North Carolina’s three primary high-growth markets,” Plath says. “And the Yankees from Pittsburgh took the bait.”
It wasn’t quite that simple, of course. In choosing North Carolina, FNB looked at 100 metropolitan areas across the Midwest, Northeast, Mid-Atlantic and Southeast regions to decide where its business model would be most effective, particularly in commercial and industrial lending, Delie says.
Demographics also played a key role. Most of Yadkin’s 100 offices were in parts of North Carolina, averaging 7% population growth since 2010. FNB’s markets, mainly Pittsburgh, Cleveland and Baltimore, showed no population growth in that period. By accepting FNB shares in the transaction, Yadkin investors gained 35% of the company. Among those with the most at stake were two of North Carolina’s shrewdest bank investors: Abram, with a $14 million holding, and veteran Raleigh banker Mike Patterson, with $7 million.
FNB is likely to pause from additional acquisitions as it focuses on Yadkin, Wells Fargo Securities analysts wrote in a report earlier this year. “The cost savings and accretion from the [Yadkin] transaction should combine with a more favorable backdrop for loan growth and modest interest-rate increases to drive strong results for the company in the future,” they said. FNB’s dividend yield has typically exceeded its peers, making it more difficult to boost the payout. But over time, the analysts said they expect FNB “to transition back to growth through acquisition, which we consider core to our long-term favorable thesis.”
Delie rejects the notion that FNB should have moved south in a more measured way. “In today’s environment, there is no logical reason to have a connecting franchise,” he says. “Sure, we looked at opportunities in Virginia. The types of companies that we could buy in those markets, the economics just did not make sense.” Possible bank targets in northern Virginia, the state’s main growth area, were loaded with commercial real-estate loans that exceeded regulatory guidelines in some instances. Moreover, takeover premiums to acquire those banks were too high, he says.
“North Carolina fit the bill.”