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Fitch Affirms First Horizon at 'BBB-' on Merger with Capital Bank; Outlook Remains Positive
May 5, 2017 / 8:47 PM / 7 months ago

Fitch Affirms First Horizon at 'BBB-' on Merger with Capital Bank; Outlook Remains Positive

(The following statement was released by the rating agency) NEW YORK, May 05 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of First Horizon National Corporation (FHN) at 'BBB-' following the announcement that FHN will acquire Capital Bank Financial Corp. (CBF). FHN's Rating Outlook remains Positive. A complete list of rating actions follows at the end of this release. Fitch affirmed FHN's IDRs and revised its Outlook to Positive from Stable on Jan. 23, 2017. The transaction is valued at $2.2 billion financed by 80% stock and 20% cash. The deal represents a price-to-tangible book value of 2.0x for CBF, a 2.9% discount based on CBF's share price at the time of announcement. The company expects the deal to be accretive to earnings in 2019 excluding potential revenue synergies and assuming fully phased-in cost saves of $65 million annually. The transaction is expected to close in the fourth quarter of 2017 (4Q17), subject to shareholder and regulatory approvals. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The affirmation reflects Fitch's view that the CBF transaction is in line with Fitch's expectations that FHN would pursue a sizable acquisition in neighboring markets to expand its footprint and scale. This transaction provides some added geographic diversification and incrementally strengthens FHN's franchise in Tennessee. Further, assuming the realization of forecasted costs saves, this acquisition may aid the company's earnings profile. Underlying today's rating action, Fitch expects FHN to maintain capital at the higher end of its targeted ranges. Offsetting this, Fitch views moderate integration risks, and that CBF's through-the-cycle credit quality is untested. In Fitch's view, the transaction marginally enhances FHN's franchise in Tennessee and expands its presence notably into neighboring North Carolina and to a lesser extent Florida which Fitch expects will provide some degree of added geographic diversification. FHN's pro forma loan mix is similar to its current loan mix and Fitch believes CBF's well-diversified, commercially-focused loan portfolio is a good strategic fit for FHN. CBF has grown significantly through a combination of acquisitions and organic growth and as such the bank's through-the-cycle credit quality remains unproven. Fitch views integration risks as moderate due to CBF's acquisitive history although Fitch notes CBF was able to fully integrate their prior acquisitions with no delays. FHN estimates run-rate cost saves of $65 million annually which equates to roughly 30% of CBF's existing core expense base. Fitch believes these cost save estimates could prove difficult to realize due to CBF's already low efficiency ratio of 64% as of 1Q17 and limited branch overlap. However, to the extent that FHN is able to realize the forecasted cost saves from the transaction, Fitch believes FHN's earnings profile could converge with higher-rated institutions which could lead to positive rating momentum over the Outlook horizon. FHN's capital levels will come down from current levels as a result of the transaction. FHN has communicated that it intends to manage its common equity tier 1 (CET1) ratio at 8% - 9% over the longer term. Post-closing, FHN's estimated pro forma CET1 ratio is 9%, down substantially from 10.2% as of 1Q17. Fitch views the increased geographic diversification as somewhat mitigating the reduction in capital. Over time, Fitch expects FHN to manage its capital position to the higher end of its' target range. This expectation is reflected in today's affirmation as well as the Outlook remaining Positive. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES FHN's preferred stock is notched five levels below its VR of 'bbb-', two times for loss severity and three times for non-performance. LONG- AND SHORT-TERM DEPOSIT RATINGS FHN's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY FHN's IDR and VR are equalized with those of First Tennessee Bank, NA, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR FHN has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FHN is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Outlook revision to Positive from Stable on Jan. 23, 2017 reflected Fitch's view that there was more upside to FHN's ratings than downside over the following 12-24 months. Given the acquisition announcement, Fitch expects to resolve the Outlook toward the latter part of the outlook horizon to allow time for the results of the transaction to be assessed. Fitch's base case assumption is that FHN will be able to realize the estimated cost saves over the next few years. The Positive Outlook reflects Fitch's view that FHN's earnings profile will converge with higher-rated institutions. Positive rating action is possible if FHN is able to demonstrate higher and more consistent earnings in line with higher rated institutions, measured by return on average assets (ROAA) and/or pre-provision net revenue-to-average assets (PPNR to ROA). However, the Outlook could be revised to Stable from Positive if Fitch believes that FHN will not be able to realize the cost saves and that earnings will continue to lag higher-rated peers. Fitch will continue to monitor asset quality at FHN for signs of deterioration as CBF's loan portfolio has not been tested through a credit cycle. Fitch expects net charge-offs (NCOs) to remain within FHN's normalized operating target range of 20bps-60bps over time. Positive rating momentum is possible if NCOs over time remain within the target range post integration of CBF. Conversely, negative ratings pressures could arise should FHN's asset quality deteriorate more than expected such that earnings and/or capital is adversely impacted. As noted above, Fitch expects FHN will manage its capital position at the higher end of their 8% - 9% CET1 target range. Negative ratings pressure could develop should FHN's CET1 and/or TCE position fall below the estimated pro forma levels. Additionally, negative ratings pressure could develop should management pursue another bank acquisition before CBF is fully integrated into FHN's franchise. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for FHN and its operating companies' preferred stock are sensitive to any change to its VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to FHN's long- and short-term IDRs. HOLDING COMPANY Should FHN's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since FHN's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings with a Positive Outlook: First Horizon National Corporation --Long-Term IDR at 'BBB-'; Outlook Positive; --Viability rating at 'bbb-'; --Short-Term IDR at 'F3'; --Senior Unsecured at 'BBB-'; --Preferred Stock at 'B'; --Support rating at '5'; --Support Floor at 'NF'. First Tennessee Bank, N.A. --Long-Term IDR at 'BBB-'; Outlook Positive; --Viability rating at 'bbb-'; --Short-Term IDR at 'F3'; --Long-term Deposits at 'BBB'; --Short-term Deposits at 'F3'; --Senior Unsecured at 'BBB-'; --Short-term Senior Unsecured at 'F3'; --Preferred Stock at 'B'; --Support rating at '5'; --Support Floor at 'NF'. Contact: Primary Analyst Michael Shepherd, CPA Associate Director +1-212-908-9138 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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