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VOL. 128 | NO. 238 | Friday, December 6, 2013

First Horizon Stresses Patience to Investors

By Andy Meek

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The business of banking isn’t exactly a picnic at the moment for a company like First Horizon National Corp., which has made big strides toward lowering its risk profile but continues to see lower near-term profitability than it would like.

First Horizon National Corp., the parent of First Tennessee Bank, is stressing patience to investors.

(Daily News File/Brandon Dill)

Still, the company’s message to investors and the analyst community over the past 12 months – and especially in recent days – has been: “Be patient. Stick with us.”

Memphis-based First Horizon, the parent company of First Tennessee Bank, held an analyst day in Memphis shortly before the Thanksgiving holiday. It was an opportunity for the company to walk an audience that included analysts from prominent investment firms and brokerages through the company’s philosophy and share details about its strategies.

After letting the presentations sink in, the messages now coming back from at least some corners of the investment community is that the largest bank based in Tennessee still has its work cut out for it in the short term – but that over time, things will eventually get better.

Sterne Agee analysts Todd Hagerman and Robert Greene, for example, have a neutral rating on First Horizon at the moment, and in the wake of the company’s analyst day they wrote a note to clients that represented a roundup of their takeaways.

While they believe First Horizon’s management has been on the right track when it comes to right-sizing the organization to confront the new world of banking – the current low interest-rate, less branch-focused and more Web-centric world of banking, that is – “meaningful gains in core profitability will likely be slow to emerge.”

Much of the reason why, they argue, has to do with macro factors, not all of which are in the bank’s control.

“While de-leveraging the balance sheet and lowering the cost structure have been areas of focus in recent years, future earnings leverage is centered on underlying improvement in core profitability – a challenge in the current operating environment,” according to the Sterne Agee note. “We remain cautious on (First Horizon’s) revenue outlook given the low rate environment, weak earning asset growth – including headwinds tied to (First Horizon’s) outsized mortgage warehouse and waning credit leverage against a difficult economic back-drop.”

The Sterne Agee analysts also noted their sense is that potential revenue enhancements and profitability improvement remain long-term propositions with only modest benefits in the short term.

Those comments, and the analyst day itself, come only a few weeks after Moody’s Investors Service downgraded the long-term ratings of First Horizon and its subsidiaries.

Moody’s affirmed the financial strength rating of First Tennessee but lowered the bank’s baseline credit assessment. And the bank’s long-term deposit rating also was downgraded.

Moody’s said the downgrade mostly reflects the drag of First Horizon’s legacy mortgage banking business. Around the same time, RBC Capital Markets also downgraded First Horizon from “outperform” to “sector perform”

Meanwhile, Wunderlich Inc. bank analyst Kevin Reynolds titled his summary of First Horizon’s analyst day to reflect his matter-of-fact assessment: “We went in rated hold, we came out rated hold.”

“As expected,” Reynolds wrote in his recap for clients, “there were no significant strategic pronouncements, but the company did a good job of providing greater detail on its business lines and the components of its long-term profitability targets. In the near-term, (First Horizon) continues to work on driving efficiency through its culture of continuous improvement, which should increase profitability modestly.”

Among the themes First Horizon pointed to were its commitment to expense savings and to a wind-down of non-strategic businesses as well as an abiding interest in maximizing efficiency while pouring investment into growth markets like Middle Tennessee.

First Horizon, Reynolds wrote, also continues to work at resolving its legacy mortgage issues.

From First Horizon’s perspective, the company will again have a chance to present a picture of its operations to analysts in a few days – on Dec. 11, when it’s scheduled to participate in the Goldman Sachs Financial Services Conference.

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