Moody's Lowers Ratings of First Horizon (Sr to A3 from A2)
New York, November 02, 2007 -- Moody's Investors Service lowered the long-term, senior unsecured
ratings of First Horizon National Corporation(FHN) to A3 from A2.
Moody's also lowered the long term deposit and debt ratings of its lead
bank, First Tennessee Bank (bank financial strength to C+ from
B- and long term deposits to A2 from A1). The bank's short
term ratings were affirmed at Prime-1. This rating action
concludes the review for possible downgrade that began in August 2007.
Following the downgrade, Moody's also changed FHN's
outlook to negative.
The primary reason for downgrading the rating is the continued weakness
in FHN's profitability metrics and the likelihood that profitability
will remain weak over the medium-term. A key measure of
profitability for Moody's is pre-tax, preprovision earnings
as a percentage of risk-weighted assets. By that measure,
FHN's profitability is more than 100 basis points below the median for
similarly-rated peers. The rating agency explained that
weak earnings reduces coverage for unusually severe developments,
such as a sudden downturn in credit quality.
The primary contributor to FHN's weak profitability has been a challenging
mortgage banking operating environment. Current market conditions
have negatively affected mortgage originations by compressing gain-on-sale
margins, resulting in held for sale writedowns. FHN's overhead
ratio is relatively high relative to similarly-rated peers,
so future earnings improvement depends in part upon the flexibility of
its cost structure and management's commitment to keep it in line
with revenues. The current market environment has also led to losses
in FHN's capital markets business, and the timing of a return
to profitability remains uncertain. As such, FHN's lower
ratings reflect the uncertainty surrounding overall future profitability.
We expect profitability to stabilize, however, in our view
this is not likely to happen for several quarters.
Moody's also stated that the basis for the negative outlook is the
potential for further deterioration in its asset quality. The rating
agency noted that FHN's residential construction portfolio is approximately
2 times tangible common equity and has suffered a four-fold increase
in nonperforming loans in 2007. This concentration could cause
greater volatility relative to other banks where the concentration is
not as significant. Further weakening in profitability stemming
from either mortgage banking activities and/or asset quality deterioration
could result in a negative ratings action.
Despite the downgrade and negative outlook, Moody's noted that FHN's
ratings derive significant support from the company's strong franchise
in Tennessee (TN) where it ranks first in deposits with a 20% market
share. In Memphis, TN, where nearly 2/3 of FHN's deposits
reside, the bank's market share is greater than a 50%.
FHN also ranks either first or second in 8 of 10 other MSAs which account
for nearly 90% of consolidated deposits.
FHN, headquartered in Memphis, Tennessee, had assets
of $37.5 billion as of September 30, 2007.
Downgrades:
..Issuer: First Horizon National Corporation
....Issuer Rating, Downgraded to A3
from A2
....Multiple Seniority Shelf, Downgraded
to (P)A3 from (P)A2
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A3
..Issuer: First Tennessee Bank, National Association
....Bank Financial Strength Rating,
Downgraded to C+ from B-
....Issuer Rating, Downgraded to A2
from A1
....OSO Senior Unsecured OSO Rating,
Downgraded to A2 from A1
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A3
....Subordinate Regular Bond/Debenture,
Downgraded to A3 from A2
....Senior Unsecured Bank Note Program,
Downgraded to A2 from A1
....Senior Unsecured Deposit Note/Takedown,
Downgraded to A2 from A1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Unsecured Deposit Rating,
Downgraded to A2 from A1
..Issuer: First Tennessee Capital I
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A3
....Preferred Stock Shelf, Downgraded
to (P)Baa1 from (P)A3
..Issuer: First Tennessee Capital II
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A3
....Preferred Stock Shelf, Downgraded
to (P)Baa1 from (P)A3
..Issuer: First Tennessee Capital III
....Preferred Stock Shelf, Downgraded
to (P)Baa1 from (P)A3
..Issuer: First Tennessee Capital IV
....Preferred Stock Shelf, Downgraded
to (P)Baa1 from (P)A3
..Issuer: First Tennessee Real Estate Securities Co
Inc
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A3
Outlook Actions:
..Issuer: First Horizon National Corporation
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Tennessee Bank, National Association
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Tennessee Capital I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Tennessee Capital II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Tennessee Capital III
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Tennessee Capital IV
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Tennessee Real Estate Securities Co
Inc
....Outlook, Changed To Negative From
Rating Under Review
New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Gregory Frank
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653