First Horizon is getting ready to join the $50B club

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First Horizon National has wasted no time as it looks to complete its biggest bank acquisition.

The Memphis, Tenn., company agreed in May to buy Capital Bank Financial in Charlotte, N.C., for $2.2 billion, the second-largest bank acquisition announced this year. Executives used Friday’s quarterly conference call to tout early progress on the deal and their plans to immediately boost revenue once it closes.

Capital — First Horizon’s first whole-bank deal since its 2015 purchase of the much smaller TrustAtlantic Financial — is important because it puts the $30 billion-asset company on a fast track to hitting $50 billion in assets where it faces more regulation, including the Comprehensive Capital Analysis and Review stress test.

First Horizon has acted swiftly. Required regulatory applications were filed in June and executives have already “had very good discussions” with more than 1,000 employees, Bryan Jordan, the company’s chairman and CEO, said during the conference call.

The company is on pace to complete the deal in the fourth quarter; system conversions will likely occur in the first half of next year. All cost reductions should be completed by 2019, though management plans to take advantage of revenue opportunities “day one,” Jordan said.

“We’ll start to grow relationships and offer more services … and we think we'll very actively hit the ground running in those opportunities,” Jordan added.

While management hopes to boost mortgage lending and offer other products to Capital customers, its performance metrics largely hinge on an ability to cut Capital’s annual noninterest expense by about 30%.

First Horizon’s timetable seems reasonable, industry experts said, because both companies have relatively clean balance sheets. They also noted that several other deals had speedy approvals. It took just 145 days, or less than five months, for Pinnacle Financial Partners to buy BNC Bancorp in High Point, N.C.

“I wouldn’t expect any sort of issue,” said Michael Rose, an analyst at Raymond James, though he cautioned that any deal could be tripped up by an unexpected issue tied to the Community Reinvestment Act or anti-money-laundering compliance.

While the management team will likely take a pause to integrate Capital, it will likely want to pursue other bank acquisitions as the company approaches the $50 billion asset threshold, industry experts said.

First Horizon will "absolutely" pursue more deals, said Christopher Marinac, an analyst at FIG Partners. “I think First Horizon has plenty to say grace over with Capital … but the company is geared to do additional transactions.”

Capital’s unusual geography — it has only 12 branches between North Carolina and South Florida — gives First Horizon ample opportunity to buy banks to fill the gap, Marinac said.

Management was also asked about an interest in acquisitions to spark FTN Financial, its capital markets business. The company, despite its purchase of Coastal Securities, recently provided lower guidance on expected average daily revenue from its fixed-income business. Fixed-income operations often suffer in a rising-rate environment.

While the fixed-income and trading business will “contribute positively” to revenue, First Horizon’s bank remains “the 800-pound gorilla that drives our results,” Chief Financial Officer William Losch said.

First Horizon would have about $40 billion of assets after it buys Capital, which will create potential challenges as it nears the size that would make it a systemically important financial institution. That has been the case for the $49.1 billion-asset New York Community Bancorp, which has been suppressing its own growth as it looks for a meaningful acquisition.

First Horizon’s management has expressed optimism that the threshold could be increased. The company could stay under $50 billion in assets until such changes are enacted by focusing on areas such as fixed income, Rose said.

The company could eventually buy a “nice Southeastern franchise” if regulatory reform lags and management can snag another deal “at a fair price,” said Brady Gailey, an analyst with Keefe, Bruyette & Woods.

“I believe they’ll take somewhat of a pause just to get Capital closed and digest that,” Gailey said. “Beyond that, I expect them to be on the prowl and do another deal in short order, which could push them over the $50 billion mark.”

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