First Horizon National Corp.
) announcement that it expects to incur a huge charge for beefing
up its mortgage repurchase reserves in the second quarter, Fitch
ratings downgraded the issuer-default rating (IDR) of the company
and its lead bank, First Tennessee Bank, N.A. yesterday. Also, the
agency has put the rating on a negative watch.
Long-term IDR of First Horizon as well as First Tennessee Bank
now stands at 'BBB,' down from the previous rating of 'BBB+.'
Rationale Behind the Downgrade
The ratings downgrade from Fitch comes after First Horizon
revealed that it would take a pre-tax charge of $250 million for
mortgage repurchases in the second quarter. The company will boost
its mortgage repurchases reserve to meet repurchase demands from
two government-sponsored entities (GSEs), Fannie Mae and Freddie
The amount significantly outstrips the prior three-quarter
average of $50 million. It is also well ahead of the rating
agency's expectations. The hefty charge would likely result in the
company reporting a loss for the full year 2012. However, the
agency noted that even without such charges the company's profit
has been low for the recent quarters as compared to its peers who
are rated similarly.
Within a short period, the rating agency will review all the
ratings of First Horizon. Its ability to reinstate profitability
measures will be of key importance in such a review. Private label
put-back risk will also be a crucial factor in the review.
Notably, at the end of the first quarter, First Horizon's
reserves stood at $161 million. For meeting repurchase activity in
the second quarter, around $60 million is expected to be realized
by First Horizon as losses. Therefore, at the end of the second
quarter, the company's mortgage repurchase reserve is likely to
stand at $351 million.
We believe the rating downgrade will adversely affect its
position with respect to its credit worthiness. Also, First
Horizon's mortgage repurchase expense will continue to remain an
overhang in the quarters ahead.
As a matter of fact, though the company sold its mortgage
origination and servicing platforms in 2008, it still bears the
liability for the conforming conventional mortgage loans purchased
by the GSEs from First Horizon which were originated over many
years till 2008. Hence, concern regarding this exposure
Earlier in June,
PNC Financial Services Group Inc.
) also announced that it will boost its residential mortgage
repurchase reserves by around $350 million in the second quarter of
2012. The decision stemmed from the company's experience of
recently elevated levels of GSE-related repurchase demands. The
mortgages were mostly originated by National City Corp., which was
acquired in 2009.
Moreover, for First Horizon, shrinking revenue base, low
interest rate environment and regulatory issues amidst a protracted
economic recovery will continue to serve as headwinds. Yet, cost
containment efforts, solid capital position and share buyback
activities are viewed positively by the investors.
First Horizon shares maintain a Zacks #3 Rank, which translates
into a short-term Hold recommendation. Considering the
fundamentals, we also maintain our long-term Neutral rating on the
FIRST HRZN NATL (FHN): Free Stock Analysis
PNC FINL SVC CP (PNC): Free Stock Analysis
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