First Horizon to Sell Sites in Unfundable Expansion

With agreements to sell its branch network outside Tennessee, First Horizon National Corp. in Memphis on Tuesday formalized its retreat from a national retail expansion that is no longer viable as it battles a tough environment on several fronts.

For the four buyers, including Fifth Third Bancorp of Cincinnati and M&T Bank Corp. of Buffalo, First Horizon's decision to sell offered an opportunity to expand in geographical areas of interest to them faster than building from the ground up. Unlike First Horizon, they also have the resources to invest in the sites.

The $39 billion-asset First Horizon announced a plan to sell the 34 branches in Atlanta, Dallas, Baltimore, and northern Virginia in July after the offices lost $10 million in the second quarter. The move scuttled a plan to expand retail operations by piggy-backing on the mortgage division, a business First Horizon has also scaled back recently as it seeks to cut $170 million from annual expenses by next year and stay independent.

Christopher G. Marshall, chief financial officer of the $101 billion-asset Fifth Third, said it is buying nine Atlanta-area First Horizon branches, and he described their mix of $150 million in deposits as "what you'd expect from a de novo." The oldest branch involved in the deal was opened in 2005. Mr. Marshall said the Cincinnati company plans to broaden the product mix to include wealth management, credit cards, and cash management and payment processing for business customers. "We think there is [a] huge upside in being able to bring our broad product set through that distribution," he said.

The branches are in Gwinnett, Cobb, Fulton, and Walton counties, which are "among the most demographically attractive neighborhoods" in the market, he said. Fifth Third would also get $200 million of loans.

"We're very focused on the Southeast," Mr. Marshall said in an interview Tuesday. "We would have built in those neighborhoods anyway. What this purchase allows us is to accelerate our timeline and have a more significant presence much faster."

Fifth Third had already made inroads in Georgia through recently announced deals. It would obtain two Atlanta branches with its pending purchase of First Charter Corp. in Charlotte, which is scheduled to close in the first quarter, and three sites in Augusta and a Georgia thrift charter after it buys R-G Crown Bank from R&G Financial Corp. of San Juan, Puerto Rico, which is set to close next quarter. The deals for the First Horizon branches are to close between now and the first quarter. None of the companies disclosed the deals' terms.

M&T is to buy 13 branches, 10 in Washington and three in Baltimore, areas that are part of its broader expansion in the Middle Atlantic region. The $58 billion-asset company entered the region in 2003 with the purchase of Baltimore-based Allfirst Financial Inc. Since then, it has opened 10 branches in Virginia and has said it would add more, though it plans to do so deliberately rather than through an aggressive growth plan.

"One of the attractive aspects of this acquisition is attractive locations," deposits, and commercial lending activity, said Atwood "Woody" Collins 3rd, the president of M&T's Mid-Atlantic division. First Horizon's branches come with "a lot of good people," he said.

M&T will get $226 million of loans and $201 million in deposits ? slightly less than 10% in demand deposit accounts, which Mr. Collins said is attractive. Like Fifth Third, he stressed that the branches are fairly new, built between 2003 and 2006. (First Horizon meanwhile said Tuesday that its Middle Atlantic branches were the best performing among those it is selling, producing near break-even results.)

Mr. Collins said similar branch purchases are possible but that M&T could also do whole-bank deals in the region.

Meanwhile, Sterling Bancshares Inc. in Houston is buying 10 Dallas-area branches with $81 million of loans and $100 million in deposits. And FMCB Holdings Inc., a privately held banking company in Senoia, Ga., is buying two branches in rural Georgia.

Charles Burkett, the president for Tennessee and national banking at First Horizon, said his company had once planned to build its share in those markets to 8% to 10%. "We hadn't seen a large amount of growth because we hadn't invested in them properly, and we weren't as convenient for customers as we needed to be," he said in an interview.

First Horizon had a long way to go to reach its market share goals. In Atlanta, it had just 0.16% of the local deposits in June 2006, according to data released last fall by the Federal Deposit Insurance Corp. Its share was significantly lower in the other three markets.

"We felt that it would be necessary to invest more money to have a larger branch network and to spend more on the brand to get recognition," Mr. Burkett said. "Those things take time, where we needed to improve our earnings in short order."

First Horizon still has charters ? but no branches or assets ? in states such as Missouri and Colorado, he said, and does not plan to sell them.

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