Moody's Investors Service, a rating arm of
), downgraded the rating outlook of
First Horizon National Corporation
) and its subsidiaries. Moody's downgraded the senior unsecured
debt rating of First Horizon to Baa3 from Baa2.
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Additionally, the baseline credit assessment (BCA) of First
Tennessee Bank - the primary banking subsidiary - was lowered to
baa2 from baa1. However, the standalone bank financial strength
rating (BFSR) of First Tennessee Bank was affirmed at C-.
Therefore, the long-term deposit rating of First Tennessee Bank
was downgraded to Baa2 from Baa1, whereas the short-term deposit
rating was affirmed at Prime-2.
Why the Downgrade?
The rating agency is concerned with First Horizon's obstacles to
reach heightened profitability, primarily from the company's
legacy mortgage banking business. Recently, the company signed an
agreement in principle with
), settling certain legacy representation and warranty repurchase
obligations related to loans originated from 2000 to 2008.
As a result, in the quarter ended Sep 30, 2013, First Horizon
reported loss per share of 45 cents, accounting for the negative
impact of 64 cents per share (after tax) due to the addition of
$200 million to the repurchase reserve.
Although, a substantial part of the repurchase reserve was
related to a still awaiting settlement with Fannie Mae, the
company's repurchase expense will continue to remain an overhang
on its financials. Notably, from 2009, First Horizon's cumulative
repurchase provision equals 50% of its pre-provision pre-tax
income (excluding repurchase provisions).
The rating agency is also concerned about the company's weak
credit quality. First Horizon has a significant exposure to
problem loan categories such as national home equity loans. The
asset quality of the company remains affected by its hefty
run-off loan portfolio, which constitutes roughly 20% of total
loans. Further, more than half of the company's problem loans are
from the run-off portfolio.
As of Sep 30, 2013, the company's non-performing assets
(including loans past due 90 days or more and all restructured
loans) was 5.7% of loans plus other real estate owned. Even
though, the company is gradually winding down its non-strategic
loan portfolio, it will continue to be a drag on its credit
quality for some time.
On a positive note, Moody's upgraded the outlook on First Horizon
to Stable from Negative. This was based on the parent company's
efforts to strengthen its core retail banking franchise in
Tennessee. Additionally, the rating agency was impressed with the
company's healthy capital position, which will help counter the
hazards of mortgage-related charges in the future.
As downgrades in ratings affect investors' confidence in the
company and its creditworthiness in the market, First Horizon's
endeavor to lower its exposure to problem loans appear impressive
to us. The company also aims to control costs and improve
long-term profitability by strengthening its core Tennessee
Nevertheless, regulatory issues and the likely persistence of low
interest rates could limit the stock's upside potential in the
First Horizon currently carries a Zacks Rank #4 (Sell). A
Southeast bank we prefer is
American National Bankshares Inc.
), which carries a Zacks Rank #1 (Strong Buy).