Pinnacle Financial Partners' (PNFP) CEO Terry Turner on Acquisition of Magna Bank - Call Transcript

Pinnacle Financial Partners, Inc. (NASDAQ:PNFP) Magna Acquisition Investor Conference Call April 29, 2015 9:30 AM ET

Executives

Terry Turner – President and Chief Executive Officer
Harold Carpenter – Executive Vice President and Chief Financial Officer

Analysts

Kevin Fitzsimmons – Hovde Group
Michael Rose – Raymond James
Kevin Reynolds – Wunderlich Securities
Tyler Stafford – Stephens
Andy Stapp – Hilliard Lyons
Brian Martin – FIG Partners

Operator

Welcome to the Pinnacle Financial Partners Magna Bank Acquisition Investor Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, President and CEO of Pinnacle. He is joined by Harold Carpenter, Chief Financial Officer of Pinnacle. Please note the release announcing Pinnacle's proposed acquisition of Magna Bank and this morning's presentation are available on the Investor Relations page of Pinnacle's website at www.pnfp.com.

Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The floor will be opened for your questions following the presentation. [Operator Instructions]. Before we begin, Pinnacle does not provide earnings guidance or forecasts.

During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond Pinnacle Financial’s ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in the press release announcing the transaction and in Pinnacle Financial's most recent Annual Report on Form 10-K.

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial’s website at www.pnfp.com.

I would now like to turn the call over to Mr. Terry Turner. Sir, you may begin.

Terry Turner

Thank you operator. Good morning and thanks to all of you who are joining us on the call this morning. We appreciate your interest in our firm. I'll start here where I started the last several calls, and that's with our long-term plan or long-term outlook. Broadly, we've said we intend to build a $13 billion to $15 billion bank operating in all four Tennessee's urban markets. The key building blocks, they include developing the best-in-class CRE program to match what we have done in our C&I program in the state of Tennessee, expanding to Chattanooga and Memphis, and investing in fee businesses that improve our profitability and diversify our revenue streams.

This morning, obviously, we are here to talk about our expansion to Memphis. There are really two specific components we want to talk about. First is the acquisition of Magna Bank, and secondly is the lift out of the team of eight bankers from First Horizon. We signaled our interest in the Memphis market really going all the way back to the inception of our firm, calling ourselves and urban community bank, and focusing on the urban markets of Tennessee. I think most everyone on the call understands what we've built in Nashville and Knoxville, which are two very attractive growth markets. And clearly size and growth dynamics for those markets are excellent.

But really the principal reason for our success has not been the economic growth of the markets. It's really been the competitive landscape. Those two markets are dominated by large regional banks who as a group have given up extraordinary bankers and extraordinary share volumes to our more engaging model for both associates and clients. That's really the primary appeal of the Memphis market. It's dominated by exactly the same set of regional banks, the same ones that we compete with in Nashville and Knoxville where we have been the fastest-growing bank in the market. Magna Bank is an ideal merger partner for PNFP. It's an extremely well-run bank. I would say, much like Pinnacle and much like CapitalMark, it's really poised for meaningful operating leverage. It's at a point where the growth is beginning to accelerate.

I would say that the balance sheet growth has been nice, the asset quality has been excellent, and the profitability is ramping up just as I mentioned. In the first quarter of 2015, they had a 1.01% ROAA and excellent growth, 33% growth in net income. I think one of the things that is most attractive to me about Magna is the management and leadership of the company and the board. That's a critical thing for anything we'd want to do on a market extension. Kirk Bailey, who is the Chairman, President and CEO of that company, is a journeyman banker, been involved in several banks, including having been the Memphis President for Union Planters in Memphis at a time prior to starting Magna Bank.

So I would go on and say that this acquisition really is a scalable platform for us to launch our growth strategy. I think, again, that's a really important part of what we're trying to do. Most of you understand that – continue to view our company primarily as an organic grower, and the acquisitions that we've made really are only interesting because they serve as a platform to continue our organic growth model. Magna is well-positioned in the Memphis market. You can see we've listed its position there as the 12th in terms of FDIC market share in the MSA, as I think, back on Slide 22, there's a breakdown of the FDIC market share. You can see there I think one of the things that excites me about this is that really just 2% growth in market share would put us in a number five position in the market. So you've got a lot of small players that follow these big regional banks. And so, again, it's not an insurmountable challenge to propel ourselves past a lot of the smaller local banks.

Obviously, anytime you're looking at an M&A transaction, we are not – somebody asked me would the deal be accretive, and I kind of smiled. I thought I certainly wouldn't do one on purpose that was not accretive, and so this is a handsome transaction. It will put us in a position to be $8 billion in pro forma assets. That includes Pinnacle, CapitalMark, and Magna Bank. It will be accretive to our first 12 months of earnings, approximately 5% in terms of long-term EPS accretion, and it's accretive day one to tangible book. So, it is a very handsome transaction.

With that, I'll turn it over to Harold and let him review the transaction in more detail.

Harold Carpenter

Thanks Terry. Getting more into the details of the transaction, the primary items are detailed on the chart and for the most part were in last night's press release. Based on the 10-day trailing average, we are valuing the transaction at almost $83 million, which equates to $15.41 per Magna share. With a $9.86 tangible book value, this equates to 156% tangible book value premium. And as Magna has earned $0.99 per share over the last four quarters, the trailing 12 multiple is approximately 15.5.

As to comparables and the peer groups we looked at, we believe we have a fair, very fair transaction given the high quality of the Magna franchise, but all in all, we feel like both shareholder groups are being rewarded. The transaction is structured around 1.325 million Pinnacle shares, along with cash of almost $19 million being delivered to the Magna shareholders at closing. The exchange ratio for the share component works out to be approximately 0.3369 PNFP shares for each Magna share, or about $62.1 million. They also have 328,000 outstanding options with a weighted average exercise price of $8.36. Any outstanding options will be cashed out at closing at a $14.32 value per option. Stock options make up about $2 million of the total transaction value.

Additionally, our plans are to redeem the SBLF at close. We will work through all those requirements over the next few months. We did not entertain any idea of maintaining the SBLF after the close. So considering the $19 million required for the close, $18 million for SBLF, as well as the cash requirements for the CapitalMark transaction, we continue to study potential sub debt issuances for our firm to assist in funding the cash component of the acquisitions. A key point in all of this is that Magna does not have a holding company so that SBLF is at the bank, so that provides slightly more flexibility when it comes to funding the cash requirements. We also have four very experienced longtime Memphis banking leaders to join our franchise and we'll also add another independent director to the Pinnacle board with Thomas Farnsworth. We are very excited and look forward to the significant contributions each of these individuals will make to our firm in the future. Information regarding these individuals is provided in the appendix.

You can see the expected closings which we are pegging at September 30, 2015, basically the same date as the CapitalMark close. It will be a busy summer. As to regulatory filings, Magna has a very strong reputation and relationship with the various regulatory organizations, so we expect the regular process to go smoothly. For those of you that were on the CapitalMark call, you will notice that we are expecting systems conversions for Magna to occur in the fourth quarter of this year, which is a few months before the CapitalMark conversions. The reason for the acceleration is due to systems contracts and expiration dates as Magna has a shorter string on the expiration of their IT licenses. Here are the usual pie charts.

You've probably seen a lot of merger presentations. A segment that we are particularly excited about with Magna is the commercial real estate segment as Magna has developed some unique niches in this segment that we believe we can capitalize and expand upon. Additionally, our due diligence process was very impressed with Magna's credit processes in both client collection as well as underwriting practices. In the end, yes, Magna is a slightly different firm from both Pinnacle and CapitalMark. Magna is in businesses that we would not likely have invested in absent this transaction. We do have managers in Pinnacle that are experienced in mortgage servicing and understand and believe in the business model over the long haul. Thus we have elected to invest and expand rather than divest and contract. Even with all that, after you add up all three banks, you'll see that our loan mix remains fairly consistent with where we are today. As to deposits, we believe we have three firms that have a very similar business mix and compete every day for high quality operating accounts and business on our manager checking accounts.

Magna, like CapitalMark, has a deep funding base with very little clients. Our branch distribution thesis is that we believe the present Magna locations are in great locations in which to launch our franchise which are targeted to be $2.5 billion over the next several years. We won't spend a lot of time here as much of this information is on the slide. Obviously, the due diligence process is all about risk identification and mitigation. We designed the process along the same lines as our EWRM process so that we can analyze the risk in a manner similar to how we carry out our EWRM processes at Pinnacle. Again, and similar to the CapitalMark due diligence, we basically asked our leadership to carry out our due diligence effort.

At the end of the day, our due diligence team came away with a very favorable impression of the operating environment at Magna. Our process resulted in a conclusion supporting a well-run organization with a strong risk management culture. We did not include any revenue synergies in our merger modeling but believe they do exist. Magna has a unique and interesting commercial real estate servicing platform that is expandable, and given our goal to be Tennessee's preferred CRE lender, we hope to leverage that aspect of Magna's business to the combined firm.

Additionally, Magna services approximately $1.2 billion in residential loans currently. Their track record has been particularly sound in this area over the years. They have some very close relationships with real estate brokerage firms in their markets, so there too we hope to be able to capitalize going forward. Additionally, we believe we have meaningful opportunities to leverage the Pinnacle platform to Magna in Wealth Management, particularly brokerage and trust. The primary purchase accounting assumptions we use in our modeling are detailed on the slide. We'll be focusing on getting to a more precise answer for these items over the next few months as the close date becomes more in focus. The synergy case involved an anticipated 25% cost saves.

As to expenses, we focused on 2016 and 2017 expense forecasts and have a high degree of confidence that we can achieve our targets. This involves numerous meetings with the leadership at Magna going through the expense book line by line. As I mentioned earlier, systems conversions are currently anticipated for late 4Q 2015. At the end of the day, the operating environment we believe will resemble what we have currently planned – or what we currently have in our announcement franchise currently planned in Chattanooga, except for the commercial and residential mortgage servicing platforms, which will remain in Memphis.

As to merger-related expenses, the customary items are included here, including executive contracts, system conversion expenses, et cetera. Now the good stuff. We think we have a conservative business case. As you know we have believed basically since our founding in 2000 that Memphis was a market where Pinnacle needed to be. We have had opportunities over the years but Magna was an opportunity we needed to capitalize upon. Magna has seen some meaningful improvements in profitability over the last few years, a testament to the Magna associates.

All things considered and believing our synergy case should basically be fully deployed in 2016, we believe a 3.4% accretion in 2016 is very much achievable. The transaction is neutral to tangible book value at close. Capital ratios, especially tangible and Tier 1, remain in very strong shape. None of the ratios above include any equity or debt offerings. For the cost of capital crowd, a significant internal rate of return at 30% with a 16 PE multiple as the terminal value after almost five years of performance.

With that, I'll turn it back over to Terry to discuss the Memphis lift out and to wrap up.

Terry Turner

Thanks, Harold. I made this point over the years 1,000 times. I've probably made it a time or two in this call already. I do continue to view our firm primarily as an organic growth firm, and I would say that Magna is a fabulous platform for organic growth. We will deploy exactly the same strategy in Memphis that we have in Nashville and Knoxville, which is basically trying to hire the best bankers in the market and enabling them to move their clients to Pinnacle. We've hired Damon Bell.

Damon Bell previously led First Tennessee's private banking groups in Memphis. He will come on board with us and be our Pinnacle Memphis President. He will join Pinnacle's leadership team. He's brought with him seven other Memphis banking professionals, basically two commercial bankers, two private bankers, a treasury management consultant, and two support staff. And so they will come on board. In fact, they are onboarding as we speak. And we expect that unit to begin in earnest in the market in the next week or two once folks are trained and have access to systems and so forth.

We have filed the regulatory notices. We'll begin operation as a loan and deposit taking operation. The workspace is being finalized for this group and should be available in the next two weeks. And again, just so you understand, this group of people will be Pinnacle employees immediately and begin booking their volumes to Pinnacle. We believe that this group, this lift out group, should produce $250 million in loans, $175 million in deposits by the end of period 2017.

Of course, you know how that works. We incur all the expenses from day one and build the revenues over time, so we would anticipate something between 1% and 2% dilution in 2015, basically breakeven in 2016, and then greater than 2% accretion in 2017 on this lift out group. Most of you have heard me say over the long term our desire is to build out a $2.5 billion bank in that market. When we are complete with the merger and close the merger in the fall of this year, Kirk Bailey will serve as our Chairman in that market, Damon Bell serve as our President, and we believe that's an extraordinary team not dissimilar to my partnership with Rob McCabe here in the national market. So, I'd say, in summary, hopefully it's evident that we are working our long-term plan.

We're putting in all the foundational pieces that we've talked about. Memphis really represents the final piece of that market expansion puzzle. We believe Magna is the ideal platform for us to launch in Memphis. We've got a major lift out which I think provides meaningful C&I and affluent banking thrust. Magna is a very attractive transaction to us from a financial standpoint, and as Harold has already pointed out, we feel like, with a very conservative case concentrating exclusively on cost takeouts, it's a meaningfully accretive transaction, but we are very excited about revenue synergy potentials that have not been build into our business case.

So, operator, with that, I'll stop, and we would be glad to open for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Turner, the floor is now open for your questions following the presentation. [Operator Instructions] And our first question comes from the line of Kevin Fitzsimmons with Hovde Group. Your line is now open.

Kevin Fitzsimmons

Hey, guys. Good morning.

Terry Turner

Hey, how are you Kevin?

Kevin Fitzsimmons

I’m good, I’m good thanks. Just a quick question on what you think you need to have in place in Memphis. So this gives you five branches. How many do you think you would want ultimately? And do you think any additional ones you'll need will be strictly de novo, or would you be open to more deals? Some of the comments you've made seems kind of finalized, that this is the fourth and last large urban market you want to be in. But just curious. Does that shut the door to future M&A? Is it still open? How do you view that? Thanks.

Terry Turner

Yes. Thanks, Kevin. I think let me deal first with the question of M&A. I think, on the earnings call several weeks ago, I tried to spend a meaningful amount of time really addressing what our M&A strategy is and what kind of things we would consider. Of course, one aspect of the M&A strategy has been the market extensions to Chattanooga and Memphis. But I think I also indicated that we would consider in-market acquisitions. I specifically tried to highlight rationale for Nashville as an example.

We like our distribution here in Nashville. So if we found opportunities where we can get meaningful cost takeouts and meaningful synergies and so forth, an in-market deal in Nashville would make sense from that perspective. I talked about in the case of Knoxville that we would consider additional acquisitions there. Again, in that case, more about accelerating our distribution. We now have five offices in Knoxville. I'm not sure what number you need, but it's a number like 10. And I've always said 8 to 12 offices. And so right now, we are on a path where we build out an office a year in Knoxville.

The reason I talk about building out an office a year, generally it takes us 12 months to push them through breakeven, so adding one a year is a pretty comfortable pace. I believe we can get through breakeven in 12 months. And so again, I think you can see from that that, now that we are in both Chattanooga and Memphis, we can consider in-market deals there as well. So, I wouldn't necessarily rule that out.

Again, I just try to get this in balance. My mindset, I think the mindset of the leadership and board to this company is organic growth. That's how we make our money; that's what we do best. But when we can do things that augment and add to that, we are receptive to that. So, when we talk about the fourth and final market, I think the point of that Kevin is that, we’re now in the geographic markets that we need to be an, but we didn't say it's our fourth and final acquisition.

We said it's the fourth and final market. So hopefully that's helpful. I think, in the case of how many offices do we need, I just mentioned our strategy of building out one a year is what we do in Knoxville. That's what our intent is in Chattanooga. I think you could expect a similar outlook for Memphis as well. And again, I'm not sure what the total distribution system is required to be there, but it's probably a number like 10 or 12 offices over time.

Kevin Fitzsimmons

Great. Thanks Terry. Could I also just ask about both of these are coming at the same time, the deal and the team lift out. And you mentioned earlier that you've a long, long time ago stated your interest in Memphis but it definitely has picked up more recently in recent quarters. Can you give us a sense on what kind of time line each of these transactions were on in terms of – have you been talking to Magna for quite some time, and did the team lift out come on the tail end of that once you saw that happening, or how each of those came about. Thanks.

Harold Carpenter

Kevin, This is Harold. I think the Magna transaction discussion started probably in January. I look back and I think the NDA was signed somewhere towards the middle of February, I believe. So, I think that's when the Magna started. So, I'll let Terry talk about the Memphis lift out.

Terry Turner

I think the Memphis lift out discussions probably began shortly after that. You know, intentionally, we are working both and frankly have worked several other avenues as well as we've gone down through here. But these two plays were the most important to us as, again, I keep trying to make sure we get communicated. Some companies have an M&A strategy where they are trying to cobble their company together with acquisitions. That's not what we're trying to do. We're trying to be an urban community bank in for urban markets in Tennessee.

As it happens, we can do some acquisitions to accelerate our entry into those markets. But still we are about organic growth, and so the lift out is an important piece of what we're doing there. As I say, we are trying to take that as a platform, hire the best bankers in the market, and move market share. That's really why we are going to Memphis, and so that's the basis for the lift out. And we did work hard and do our best to try to choreograph the two simultaneously.

Kevin Fitzsimmons

Got it. Thank you.

Operator

And our next question comes from the line of Michael Rose with Raymond James. Your line is now open.

Michael Rose

Hi, good morning, guys. How are you?

Terry Turner

Good, how you doing, Michael.

Michael Rose

Good, hey, I just wanted to talk about a statement that was in the press release about building a $2.5 billion asset bank in Memphis. I assume obviously the new team members you brought in are going to be a big part of that. But similar to the prior question about adding a branch a quarter, what should we expect in the way of lender hires over the next couple of years, however long it takes you think to get there? Obviously it's probably a five plus year proposition. But what should we expect in terms of lending hires? And then secondarily, obviously their loan mix is a little bit more skewed towards commercial real estate at this point. Would you expect that to remain relatively consistent, just given the dynamics of Memphis relative to Nashville? Thanks.

Terry Turner

Okay. I think, in terms of hiring, you ought to expect us to do what we have done in Knoxville. When I say that, that's a place where we went in, we did a lift out. I can't remember the numbers exactly, but we probably lifted out a group of six or seven day one, pretty quickly had 12, and then over time – I would say, today, the Knoxville markets probably got 60 associates in it, a number like that. And that of course includes – and we have, as I say five offices. We started with one and built them out. And again, that's from 2007.

Today, the loan portfolio over there would be just short of $1 billion. So we are at a bank with when you put fixed assets and a security portfolio on it and those kinds of things probably $1.2 billion bank or something since 2007. And so again in the case of Memphis, we've got an accelerant there in the form of Magna. But the purpose of the hiring there is to increase – we are not interested in – when you look at mix and if you think the mix isn't right, there's two things you can do. You could say, well, we'd like the shrink one aspect of it.

That's really not what we want to do. What we want to do is increase the C&I component and the affluent consumer component of what's there. But we want to take what they are doing and leverage that, continue to grow it as well. But you should expect that the mix will change because the hiring emphasis will be on commercial bankers and private bankers and the like, because that's really what we intend to do. I think a lot of people may not understand this about the Memphis business market, but there the Memphis business market is larger than the Nashville business market. So it is fabulous business market, and one that we expect to do well in.

Michael Rose

Okay. Thanks for taking my questions.

Terry Turner

Okay, thanks Michael.

Operator

Thank you. And our next question comes from the line of Kevin Reynolds with Wunderlich Securities. Your line is now open.

Kevin Reynolds

Thank you. Congratulations, guys, on entering Memphis.

Harold Carpenter

Thanks, Kevin.

Kevin Reynolds

So I've got two questions, one that I think you may have touched on already and talked a good bit about, so I'll ask it second. But I was interested in perhaps talking a little bit about the fee income opportunity. I know you mentioned Magna had relationships with some real estate firms in their markets. And specifically as I look out there and I see sort of the Crye-Leike relationship, I think they are in something like nine states across the South, not just in Memphis and Nashville. Do you sense there's an opportunity over time to take the existing relationship that Magna Bank has with Crye-Leike and maybe expand it into other markets to drive fee income growth beyond what we might see on the surface? And then maybe even longer-term, sort of years down the line, might you be able to piggyback off of some of those Crye-Leike offices in states outside of Tennessee to perhaps drive some fee income growth? I'm not asking about branch banking in other states but just the fee income opportunity in the mortgage line.

Terry Turner

Yes, Kevin. That is a great question. And you are right. Magna has an extraordinarily strong relationship with Crye-Leike. Crye-Leike I believe is – and I don't have a source for you on this, it's just what I've been told, so I'll pass it along in that format – I believe it is the fifth-largest real estate brokerage in the United States. That's an unbelievable thing. So, as you pointed out, it is very large. It's predominantly in the Southeast, operates in nine states Magna has a number of offices that are actually located in Crye-Leike offices where they do mortgage origination, and it is fabulous business.

So I think in answer to your question, do we see that there are incremental fee opportunities that could be associated with the Crye-Leike relationship in other Tennessee markets as well as non-Tennessee markets, we certainly intend to explore those and understand those. I would be surprised if we don't find some meaningful revenue synergies that go along with that really important and high-profile relationship. I'd just say Kevin beyond that, while that's a meaningful opportunity, Magna is a great commercial real estate lender. I think Harold hit on that in talking about what we see on their balance sheet, which is obvious.

They've got a meaningful component of it dedicated to CRE, income producing property and the like, but they run a meaningful commercial loan brokerage operation there. They've got some professionals that are widely known that control a good number of relationships with traditional permanent lenders, insurance companies and the like. And it serves as a meaningful source of fee income to Magna. And as we talk, we are in the process of trying to build the best-in-class commercial real estate business in the state of Tennessee. And so we believe there are opportunities to take that commercial real estate brokerage capability and leverage that back across the rest of the footprint. There are likely to be good opportunities there. And again, there are several other opportunities that are similar to that are probably too early to really highlight. But again, we don't build them into business case. We just don't like doing that. I'd rather focus on making sure I get the cost synergies to make the deal work. But I would be shocked if there are not meaningful revenue synergies in this transaction.

Kevin Reynolds

Okay. Got you. My next question goes back to I think the chart on Slide 4 where you've got each of your urban markets identified and the top three competitors, and it's the same across the board. But what's different, I think a little bit different in Memphis versus Nashville is that First Horizon is so strong on the commercial side there where they are not as strong in middle Tennessee. I know you've lifted the team out of there, so there ought to be some – I will put it this way, institutional understanding of what the opportunity is. But is the competitive environment different because the player at the top is different in Memphis? Do you think it's going to be harder for you to really break into that market than what you've done in the past, and considering the regions and SunTrust are a little bit smaller in terms of competitive mix there?

Terry Turner

That is a great question. Look. First Horizon is a great company. I would say First Horizon is the number one bank in the state on almost any metric you want to look at, whether you're talking about consumer share, business share, look at most of the MSAs in the state, they would have a number one share position. Of course they have an extraordinarily strong position in Memphis. I pointed out earlier in the call the market share chart on Slide 22 You know, there are 26% market share, which is an extraordinary position. And so I would say yes, First Horizon is a formidable competitor.

They are a formidable competitor in Nashville. They are a little later coming to the table but again, I view them to be a meaningful competitor in the Nashville market even though they wouldn't show up in the top four banks. But again, in terms of who we compete with, they certainly would be a meaningful competitor here. And then of course in Knoxville and Chattanooga, they have a meaningful position. It's not an unassailable position, first of all. And I would just say, you know, if you look at the chart for Chattanooga, it looks virtually identical to Memphis.

And CapitalMark has been extraordinarily successful executing what is fundamentally our strategy in that market. They are now the number four market share position there, been the fastest-growing bank in the market. And then in the case of Knoxville, again, it's the same exact competitive landscape. And again, we have been the fastest-growing bank in that market now in a number six position and traveling pretty fast. So I guess again, I don’t want anybody to think that we wouldn't have a high regard for any of these competitors, and particularly that we wouldn't have a high regard for First Tennessee. It's a credible formidable competitor. As I say, I don't think they are completely unassailable, but, again, the market doesn't look dissimilar to me in terms of competitive landscape than east Tennessee, either in Chattanooga or Knoxville.

Kevin Reynolds

Okay. And I guess one thing, you may not have a great answer for this one because it's hard to track, but when you see the deposit market share where, say, a First Horizon is 26% on that Slide 22 and Regions is 18%, do you have any feel for the commercial loan size of the marketplace, or their market share? I mean I've heard some people estimate that the numbers might be 50% of the commercial market over there. I don't know how you track that, but I know you guys have done those kinds of studies on commercial banking relationships in middle Tennessee and made public your studies in your presentations before. Have you done that kind of research yet on Memphis to get a feel for how big the commercial banking opportunity is, not just the deposit side?

Terry Turner

Yes, we have preliminary information from Greenwich, and it would indicate that First Horizon is the number one business bank in that market.

Kevin Reynolds

Okay. But no size, do you have an indication of the size?

Terry Turner

I’ve don’t, I’ve got some proxies for it, but I would be concerned about putting those out there. It's a big – if you just look at it in terms of the number of businesses, you can sort of break it apart by sales range – companies less than $10 million, companies with sales from $10 million to $500 million, companies with sales greater than $500 million in all of those segments Memphis would be a bigger business market than Nashville is.

Kevin Reynolds

Okay. Fair enough. Thanks for all your – for taking all my questions and congratulations again.

Terry Turner

Okay. Thanks, Kevin.

Operator

[Operator Instructions] And our next question comes from the line of Tyler Stafford with Stephens. Your line is now open.

Tyler Stafford

Hey. Good morning guys. I'm on for Matt today. Congrats on the deal. I hopped on a bit late, so I apologize if I missed this earlier. But clearly it's been a busy start of the year for you guys, one deal closed, now two pending. Is it fair to say that you're on the sidelines for the remainder of the year, or would you be comfortable announcing something else while these two deals are still pending?

Terry Turner

Tyler, I don't know I mean, I don't like, honestly, giving an answer to that question just because I don’t know what the future does hold. We are not aimed at something, but again, I'd rather just say what we're going to do is whatever the smart thing to do is, and it could well be to stay on the sidelines, but we are going to do whatever the smart thing is.

Tyler Stafford

Okay. That's fair. A question on capital pro forma TCE, 8.5% with both deals closed, obviously still very healthy. But it is below where you've operated at for the past few years. Can you give us any color on how you're thinking about capital once these deals close? I think the press release may mention something about a potential debt raise. Just any color or commentary there?

Harold Carpenter

Yes, Tyler. All the Tier 1 ratios, all the tangible capital ratios we think are very healthy, in good ranges. We don't think we have any issues in that regard. The one ratio, the total risk-based, which has a Tier 2 capital component to it. That’s the one we are studying. That's the one just probably got less of a cushion than the others. So that's what's brought up this whole sub debt issuance idea that we've talked about both in the CapitalMark transaction as well as in the Magna transaction. So, we are still putting together pro formas. We'll know more over the few months. I'm not saying we're going to do a debt issuance, but we just need to kind of get – come to grips with where we think those ratios are going to land, and then visit with our board about it.

Tyler Stafford

Got it. All right. That's it for me. Thanks.

Operator

Thank you. And our next question comes from the line of Andy Stapp with Hilliard Lyons. Your line is now open.

Andy Stapp

Good morning and congratulations.

Harold Carpenter

Thanks, Andy.

Andy Stapp

I'm a little confused by the 5% long-term accretion guidance on Slide 5. Do you mean that the 5% accretion will be over and beyond CapitalMark? I'm just a little confused. The footnote says inclusive.

Harold Carpenter

Yes. We think that Magna, when you get into the out years, it should be more than a 5% long-term accretion.

Andy Stapp

Okay. By itself, okay. That's what I thought. And the due diligence overview indicated that there would likely be resource and systems management enhancements to mortgage servicing. Just number one, will the enhancements be material from a cost perspective? And two, did you see any deficiencies that you might be a little bit concerned about at Magna?

Terry Turner

We didn’t – we did not see any deficiencies there. What we think will happen is when you add on the servicing that we currently do in our system and you put that on to their systems, plus whatever new servicing we have, that there may be an upgrade in the works. And it probably wouldn't be a significant number.

Andy Stapp

Okay. Great. That's it for me. My other questions were answered.

Terry Turner

Thank you, Andy.

Andy Stapp

Thanks.

Operator

Thank you. And our next question comes from the line of Brian Martin with FIG Partners. Your line is now open.

Brian Martin

Hi, guys congrats.

Terry Turner

Thanks Brian.

Brian Martin

Just one question, Harold. Just you talked about, with CapitalMark, the sensitivity kind of getting back to where you guys were. Any thoughts on, now with this acquisition, does that statement feel pretty similar what you would expect now that you're closing both of them at the same time?

Harold Carpenter

Brian, thank you. Did you ask about sensitivity? Is that where you were headed?

Brian Martin

Yes, asset sensitivity, just what this will do relative to what your earlier thoughts were on asset sensitivity with CapitalMark included.

Harold Carpenter

Yes. I think this would be helpful. I'm not saying it's going to tier all the things but we believe Magna's balance sheet is in a good spot.

Brian Martin

Okay. All right, thanks. That's all I had. The other one was answered.

Operator

I’m showing no further questions at this time, I would like to thank you all for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.