First Horizon-IBERIABANK deal to use scale for fintech investments – S&P Global

For the third time this year, a pair of regional banks are combining in a merger-of-equals, and the narrative feels familiar.

On a Nov. 4 deal call, First Horizon National Corp. and IBERIABANK Corp. executives highlighted the benefits of scale in their $3.9 billion MOE. Shares for both names are up more than 2% in morning trading.

Ten months ago, management teams for BB&T Corp.-SunTrust Banks Inc. and TCF Financial Corp.-Chemical Financial Corp. also noted scale as the top reason for their MOEs, and the market reacted favorably to those deals as well. The market reaction and the national banks’ ability to spend billions on tech spurred speculation there would be more regional MOEs to focus on financial technology.

“Scale matters in our industry. Creating this combined company gives us much more optionality,” First Horizon CFO BJ Losch III said on the deal call. “With greater size and scale, we’ll have the ability to invest more in customer experiences such as digital capabilities as well as rethink and optimize our back-office infrastructure.”

As part of an investor presentation on their deal, First Horizon and IBERIABANK executives highlighted greater size and scale as a driver of the deal as it allowed for greater investment in growth initiatives. Of six items listed, four related to fintech: digital and mobile strategies; data analytics; technology infrastructure; and artificial intelligence and robotics. The other two initiatives were treasury management and evolving customer expectations.

Asked about the need for scale to invest in technology and consumer experience, IBERIABANK President and CEO Daryl Byrd said he and First Horizon Chairman, President and CEO D. Bryan Jordan have discussed the issue at length.

“We both view scale as very important,” Byrd said. “We have both grown a lot historically. In today’s age, with the changes in technology, we think scale is pretty important, and the profitability of this transaction is really off the charts and will help us with that.”

The banks project the combined company will produce a 1.4% return on average assets with a 51% efficiency ratio. One analyst expressed some skepticism about the efficiency ratio target since it would amount to a best-in-class figure. Management responded that the figures are based off 2020 estimates while adjusting for merger impacts.

Executives said they expect $1 billion of cost synergies. An analyst mentioned that the figure is smaller than other recent MOEs, which management attributed largely to the complementary branch footprints that would translate to a limited number of closures while the banks hope to retain as many relationship-facing employees as possible.

On the current expected credit loss accounting standard, executives did not project as significant an impact as other deals. Under CECL, which becomes effective for most large banks on Jan. 1, 2020, management expects a tangible book value earnback period of two years, compared with 1.5 years under the current accounting standard.

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