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Fitch Affirms First Horizon at 'BBB-'; Outlook Remains Positive.

New York: Fitch Ratings has affirmed First Horizon National Corp.'s (FHN) ratings at 'BBB-'/'F3'. The Rating Outlook remains Positive. The affirmation incorporates the expectation that the recently completed acquisition of Capital Bank Financial Corp. (CBF) will be integrated smoothly and lead to a stronger franchise and improved earnings.

A full list of rating actions follows at the end of this rating action commentary.

The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled "Mid-tier Regional Bank Periodic Review," to be published shortly on www.fitchratings.com.

KEY RATING DRIVERS

IDRs, VRs, AND SENIOR DEBT

Today's rating affirmation reflects FHN's strong banking franchise, appropriate capital levels relative to the company's risk profile, and good revenue diversity relative to peers. The Positive Outlook reflects Fitch's expectation that management will continue to execute on its well-communicated, long-term strategies to align FHN's operating performance with operating targets over the rating time horizon. Fitch believes that FHN has rating upside over time, as reflected in the Positive Outlook.

The company's recently completed CBF acquisition was in line with Fitch's expectations that FHN would pursue a sizable acquisition in neighboring markets to expand its footprint and scale. This transaction expands the company's presence in the Carolinas and to a lesser extent Florida, which Fitch expects will provide some degree of added geographic diversification.

FHN's core business operations include its regional banking line of business (First Tennessee Bank, NA; FTBNA) and FTN Financial (FTN), the company's capital markets division. FTBNA has the leading deposit market share in Tennessee with 16% of total deposits (proforma including deposits from CBF transaction) as of June 30, 2017 and a growing presence in the company's other key operating markets. This segment has generated consistent performance over time.

FTN provides the overall company with solid revenue mix through its niche capital markets business. FTN's franchise is strong in the community bank space, evidenced by relationships with approximately half of all U.S. banks with investment portfolios over $100 million. FTN's acquisition of Coastal Securities, completed in 2Q17, provides increased product diversity to the segment's revenue streams. While revenue generated out of FTN can be somewhat volatile in various rate and economic environments, it has contributed approximately 20% of FHN's total revenue over the last several years. Fitch notes that FTN's revenue contribution to FHN will decrease with the closing of the CBF acquisition, and the company has adjusted their long-term fee contribution target to 30% to 40% over time to reflect this.

Fitch expects earnings to improve and converge with higher rated peers on a consistent basis while maintaining a sound risk appetite. FHN's balance sheet is well-positioned for a rising rate environment. Further, to the extent that FHN is able to realize the forecasted cost saves from the CBF transaction, FHN's earnings profile could converge with higher-rated institutions, which could lead to positive rating momentum over the Outlook horizon.

FHN has met many of its "Low Rate Environment" targets communicated at its investor day in 2013. In Fitch's view, this points to management's ability to successfully execute on targets that have been clearly communicated to various constituents. Fitch expects execution to remain strong which supports the Positive Outlook.

Fitch believes FHN's risk management practices are in-line with higher rated and larger banks and should reduce credit and earnings volatility in future cycles. Fitch recognizes the level of investment in risk management systems the bank has made over recent years, most notably the company's risk adjusted return on capital (RAROC) model, which is used in virtually all aspects of FHN's operations.

Although FHN's capital ratios are among the lowest in the peer group, Fitch views capital levels as adequate relative to the company's risk profile. FHN has communicated that it intends to manage its common equity tier 1 (CET1) ratio in the 8% to 9% range over the longer term. The CBF transaction is expected to bring FHN's CET1 capital ratio to approximately 9%. Over time, Fitch expects FHN to manage its capital position to the higher end of its' target range which is incorporated in the Positive Outlook.

FHN's elevated levels of nonperforming assets (NPAs) relative to peers has historically been a constraint on the company's ratings. Much of the NPAs relate to restructured residential loans originated out of the company's former national lending platform and Fitch expects FHN's NPA ratio to remain elevated over the intermediate term. However, Fitch expects the loss content from the NPAs to remain manageable and not be a drag on earnings and capital.

Fitch views FHN's funding and liquidity profile as in-line with peers. Noninterest bearing deposits comprise approximately 30% of total deposits and the company's deposit costs are in line with the peer median. Although deposit costs are expected to increase marginally as a result of the CBF transaction, Fitch views the increased geographical diversification as a partial offset. FHN also has access to multiple sources of secured borrowing, such as the FHLB. These sources were modestly used at 3Q17 and FHN still had adequate capacity at quarter-end.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

FHN's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of FTBNA are rated one notch higher than the bank'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 VR is equalized with those of FTBNA, 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 (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES

IDRs, VRs, AND SENIOR DEBT

The Rating Outlook remains Positive, reflecting Fitch's view of the likelihood of ratings upside over the Outlook horizon. Given the recently closed acquisition of CBF, 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 the FHN will be able to realize the estimated cost saves from the CBF transaction 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 AA). 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 assess 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 NCOs exceed FHN's operating target range over time.

Because FHN has resolved or reserved for most legal issues tied to past practices, Fitch does not expect any significant quarterly settlements that could lead to losses. However, to the extent that FHN reports material legal provisions that indicate the reappearance of issues related to past residential mortgage practices or new legal issues arising from current business practices, the Outlook may be revised to Stable if Fitch had concerns that capital could be impaired, although this is unlikely.

As noted above, Fitch expects FHN will manage its capital position at the higher end of its 8% to 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 the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to FTBNA's Long- and Short-term IDR.

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, there is potential that Fitch could notch the holding company 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:

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'.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Mar 8, 2018
Words:1717
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