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VOL. 127 | NO. 84 | Monday, April 30, 2012

Analyst: First Horizon Prime Buying Target

By Andy Meek

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In one analyst’s opinion, the parent company of First Tennessee Bank is one of the most attractive buying targets for large banks in the U.S. at the moment.

It’s a question – will First Tennessee’s parent ever sell? – that’s long floated around the institution. It’s even been mentioned inside the company that perhaps a more appropriate name might be Last Tennessee Bank.

To Kevin Reynolds, a bank analyst with Wunderlich Securities Inc., the management team around First Horizon National Corp. chairman and CEO Bryan Jordan is “the definition of prudent.” The company missed Wall Street’s first-quarter earnings forecast by a penny, but Reynolds still found things to like, such as the company bumping up the amount of its stock buyback – “which you don’t do if you don’t have confidence in your future.”

“They do a great job of following the plan and not getting sidetracked,” Reynolds said. “And part of the plan is, let’s get expenses down, or at least the efficiency levels in better shape.”

The company’s efficiency ratio – essentially derived by dividing total expenses by total revenue – currently sits at about 86 percent. That indicates First Horizon spends around 86 cents to generate a dollar of revenue, but bank officials have talked about wanting to bring that down to 60 to 65 cents.

Part of the reason the ratio stayed high during Q1 was the strong revenue in First Horizon’s capital markets division. The higher revenue in that division brought incentive compensation up, too.

Meanwhile, Reynolds describes his opinion about the company’s attractiveness to a potential buyer this way.

“There was an interview not too long ago where the chairman and CEO of U.S. Bank, one of the five or six largest banks in the U.S., a very strong operator, said there are five states they believe are growth markets in the U.S.,” Reynolds said. “Four of them were out west, and one of them was in Tennessee.

“I’m not saying (First Horizon) management is selling the company. My point is this: If U.S. Bank wants to be bigger in Tennessee, there’s one way to do it.”

His point was that buying First Horizon would in one fell swoop give a purchaser the top spot in almost every major market in Tennessee.

“It’s incumbent on management to work hard and do the right thing, which they are doing.” Reynolds continued. “And if they keep doing what they say they’re going to do and improve their earnings power and their profitability, then they will earn the right to stay independent.”

Not every analyst is sanguine about the company’s near-term prospects.

“First Horizon’s management team is well-regarded, and it’s important to note that they didn’t create the problems that have hit the company so hard,” reads a post from earlier this month at the financial news site Investopedia. “All of that said, I’m just not comfortable with the credit situation, though I fully acknowledge that management knows their loan book better than I ever could.”

Similarly, Morningstar Inc. analyst Maclovio Pina wrote in a recent note to clients that First Horizon is not out of the woods yet in terms of credit quality.

“I think 2013 could be a little bit better,” Reynolds counters. “And part of the reason is they clearly have their eye on things like efficiency improvements and expense savings.”

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