TEXT-Fitch cuts First Horizon National Corp IDR to 'BBB-'
Dec 13 - Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDRs) of First Horizon National Corporation (FHN) and lead bank First Tennessee Bank, N.A. (FTBNA) to 'BBB-' from 'BBB.' The ratings have been removed from Rating Watch Negative and assigned a Stable Rating Outlook. A complete list of ratings follows at the end of this release. RATING ACTION RATIONALE Today's downgrade of FHN's ratings reflects Fitch's view of FHN's ongoing future performance amidst a challenging economic environment. Fitch notes that FHN has made considerable progress in shifting its strategy over the past few years, but the progress in terms of returning to stronger levels of profitability has been delayed, due in part to the weak economic recovery. First Horizon will likely report a net loss for the year 2012, following a couple years of relatively weak profitability measures, both in absolute and relative terms to peers. Results in 2012 were particularly impacted by the $250 million pre-tax charge it took in 2Q12 relating to expected GSE mortgage repurchase expenses. FHN also continues to report one-time charges resulting from the company's ongoing restructuring and realignment of strategy. RATING DRIVERS - IDR and VR Fitch believes that going forward earnings will be challenged by the expected prolonged period of low interest rates, along with high credit costs related to the nonstrategic portfolio. The nonstrategic loan portfolio, comprising approximately 24% of total loans, has been a continual drag on consolidated results, costing FHN 20 to 25 bps of return on average assets each quarter. FHN has also reported elevated mortgage repurchase expenses in the nonstrategic business segment stemming from its prior nationwide mortgage lending strategy, which was exited and sold in 2008. Outside of any other one-time events, Fitch estimates a consolidated ROA of between 75 and 85 bps over the next 18 to 24 months, roughly in line with 'BBB-' rated banks. Whereas FHN's capital ratios were formerly strong in relation to peer, a combination of sustained, weak earnings performance (including the large mortgage repurchase charge mentioned above), a slowdown in balance sheet shrinkage since late 2010, and recently, share buybacks has brought capital ratios more in line with similarly rated banks. Between 3Q11 and 3Q12, Tier 1 common fell 130 bps to 10.69%. Capital remains acceptable in Fitch's view, but no longer represents a ratings strength, which previously had helped to offset weaker earnings and elevated problem assets. Fitch notes that under the current Basel III framework, FHN has disclosed that its pro forma Tier 1 common ratio would fall approximately 240 bps, as of Sept. 30, 2012, making it more vulnerable to the proposed NPR than others in its peer group. Capital ratios are impacted under Basel III mainly due to the high level of higher-risk residential real estate-related assets. The estimated pro forma impact would place FHN's Tier 1 Common ratio at the low end of company targets of between 8% and 9% as of Sept. 30, 2012. Fitch believes FHN is still exposed to elevated legal risk stemming from its private label securitizations (PLS), though the ultimate timing and amounts are difficult to forecast. FHN originated and securitized $27 billion of PLS between 2005 and 2008, and although the company has not received any repurchase requests to date, FHN is currently subject to six securitization-related lawsuits and three indemnification claims. The outcome and timing of these lawsuits, as well as any lawsuits FHN could be named apart of in the future, is presently unclear and thus not explicitly incorporated in FHN's ratings. However, Fitch believes that even with a large charge of up to 100 bps of Tier 1 Common, FHN's ratings are still firmly situated at 'BBB-'. Positively, FHN continues to report improvement in asset quality metrics. Fitch-calculated nonperforming assets (NPAs) and net charge offs (NCOs) have decreased 3.6% and 25%, respectively through 3Q12 versus a year ago. Fitch anticipates that asset quality with continue to modestly improve going forward as management works through the company's nonstrategic portfolio, but will likely not experience significant improvements as seen in the past given FHN's level of residential real estate-related TDRs (constituting over half of NPAs). This is due to the lifetime TDR status of residential TDRs, while commercial TDRs can cure and no longer be classified as TDRs after a certain period of performance. The visibility into re-default performance for TDRs is not good across the industry. However, FHN's reserves to TDRs appeared adequate at 16% as of Sept. 30, 2012. Fitch notes that the liquidity profile at FTBNA has continued to improve, with a material improvement in wholesale and credit sensitive funding dependence since late 2007. Moreover, similar to prior quarters, Fitch assumes FHN will continue to receive regulatory approval to upstream dividends from FTBNA over future quarters given its present Tier 1 Common ratio of close to 15%. Assuming this, Fitch believes there are adequate liquid funds available to the parent to meet not only operating expenses, but also the maturing $100 million subordinated debt in May 2013. RATING SENSITIVITIES - IDR and VR FHN, like other banking institutions in the industry, has been pursuing various efficiency initiatives in an effort to reduce costs and generate higher returns for stakeholders. The successful execution of efficiency initiatives could lead to rating action or a change in outlook over the longer term as FHN's reports profitability measures more in line with similarly rated peers. Fitch expects FHN's profitability metrics to remain somewhat muted over the near term as consolidated results are weighed down by the drag of the noncore assets. Further, while Fitch believes FHN has sufficient capital to absorb a large, one-time charge related to PLS put back risk as mentioned above, a charge outside of those expectations and similar to that of its GSE-experience could prompt negative rating action or change in outlook. Finally, as stated above, it is Fitch's assumption that FTBNA will continue to receive OCC approval relating to the upstream of dividends in order to meet holding company liquidity needs. If the OCC were to cease the approval of dividends to the parent and there were not adequate funds to meet liquidity needs at the holding company, negative rating action would be a likely outcome. RATING DRIVERS & SENSITIVITIES - SUPPORT RATING & SUPPORT RATING FLOOR In Fitch's view, FHN is not considered systemically important and therefore, believes the probability of state support is unlikely. Therefore, FHN's IDR and VR do not incorporate any government support. RATING DRIVERS & SENSITIVITIES - Subordinated Debt and Other Hybrid Securities Subordinated debt and other hybrid capital issued by FHN, and its subsidiaries FTBNA and First Tennessee Capital II are all notched down from FHN's VR of 'bbb-' in accordance with Fitch's assessment of each instrument's respective non-performance and relative Loss Severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in FHN's VR. RATING DRIVERS & SENSITIVITIES - Holding Company: FHN's, IDR and VR is equalized with FTBNA's 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 subsidiary. Double leverage was at 128% for FHN at Sept. 30, 2012. RATING DRIVERS & SENSITIVITIES - Subsidiary and Affiliated Company Rating: The below ratings factor in a high probability of support from the parent to its subsidiary. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults. Fitch has downgraded the following ratings: First Horizon National Corporation --Long-term IDR to 'BBB-' from 'BBB'; Outlook Stable; --Viability to 'bbb-' from 'bbb'; --Short-term IDR to 'F3' from 'F2'; --Subordinated debt to 'BB+' from 'BBB-'; --Senior to 'BBB-' from 'BBB'. First Tennessee Bank, N.A. --Long-term IDR to 'BBB-' from 'BBB'; Outlook Stable; --Viability to 'bbb-' from 'bbb'; --Short-term IDR to 'F3' from 'F2'; --Long-term deposits to 'BBB' from 'BBB+'; --Short-term deposits to 'F3' from 'F2'; --Short-term debt to 'F3' from 'F2'; --Subordinated debt to 'BB+' from 'BBB-'; --Preferred stock to 'B' from 'B+'. First Tennessee Capital II --Preferred stock to 'B+' from 'BB-'. Fitch affirms the following ratings: First Horizon National Corporation --Support at '5'; --Support Floor at 'NF'. First Tennessee Bank, N.A. --Support at '5'; --Support Floor at 'NF'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 5, 2012); --'U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)' (Aug. 20, 2012); --'Private-Label Representation and Warranties' (July 27, 2011). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Rating FI Subsidiaries and Holding Companies Assessing and Rating Bank Subordinated and Hybrid Securities U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains) Private-Label Representations and Warranties