Fitch Ratings has affirmed First Horizon National Corp.'s (FHN)
ratings at 'BBB-/F3'. The Rating Outlook remains Stable. A full
list of rating actions follows at the end of this press
release.
The rating action follows a periodic review of the mid-tier
regional banking group, which includes BOK Financial Corp. (BOKF),
Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC),
First Horizon National Corp. (FHN), First National of Nebraska,
Inc. (FNNI), First Republic Bank (FRC), Fulton Financial Corp
(FULT), People's United Financial Inc. (PBCT), Synovus Financial
Corp. (SNV), TCF Financial Corp. (TCB), Webster Financial Corp.
(WBS), Wintrust Financial Corp (WTFC), and UMB Financial
Corporation (UMB).
Company-specific rating rationales for the other banks are
published separately.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
Fitch's views FHN's ratings as solidly placed at 'BBB-' The
company continues to exhibit a strong franchise in the Southeast
shown by the #2 market share in the quality economic market of
Tennessee. Furthermore, FHN's core business lines (regional bank
and capital markets) continue to generate reasonable capital and
absorb the risk of potential litigation risks. Finally, Fitch notes
the strength of management's efforts to wind down the nonstrategic
loan portfolio while minimizing credit losses.
While progress has been made over the last year in addressing
legal through an announced agreement with Freddie Mac (FHLMC) and
Fannie Mae (FNMA) relating to loans sold to the GSEs leading up to
the crisis, Fitch believes FHN's ratings are constrained to their
current level over the long-term given additional legal overhang
associated with the company's former legacy business strategy as
well as its tepid consolidated earnings performance. Furthermore,
Fitch continues to believe that FHN's asset quality will lag that
of higher-rated peers given the sticky nature of its nonperforming
assets.
Over the past year, FHN reached agreements FHLMC and FNMA
relating to loans sold to the GSEs between 2000-2008. While Fitch
viewed the announcements as generally credit neutral overall, the
settlements are also viewed as positive steps forward for FHN in
getting out from under various legal overhangs that resulted from
past national mortgage lending strategies. The current rating and
Outlook for FHN incorporates the view that the $200 million
provision made in 3Q'13 would be sufficient to cover both
GSE-related settlements and other idiosyncratic costs relating to
legacy strategies.
Fitch expects FHN to continue to resolve outstanding legal
contingencies over the near-to-mid-term. The company established
$92 million of net loss accruals from 4'Q13 through 3Q'14 related
to legal matters and points toward resolution of legacy matters. At
3Q'14, its litigation reserve had $56 million set aside to likely
cover potential payouts relating to the origination and sale of $27
billion of private-label securitizations between 2005 and 2008. The
company is currently subject to five securitization-related
lawsuits and three indemnification claims.
Fitch notes FHN is also being investigated by the U.S.
Department of Justice (DOJ) (on behalf of the Housing and Urban
Development [HUD]) relating to the underwriting of FHA loans which
could result in further settlement payouts.
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 current
ratings. However, Fitch expects FHN to maintain reasonable capital
levels consistent with its overall risk profile even after
settlement of these legacy issues. This expectation is incorporated
in today's rating action and the current Outlook.
Overall, capital remains adequate relative to similarly rated
banks and supports FHN's current rating. At 3Q'14, FHN had an
estimated Basel III capital equity tier 1 (CET1) of 11.4% compared
to management's target of between 8.0% and 9.0% in a normalized,
higher rate environment. Management has shown its willingness and
ability to re-evaluate capital distribution actions, such as
pausing its share repurchase program after the FNMA settle was
announced in 3Q13, in order to maintain its strong capital
base.
FHN's core business lines have maintained adequate performance
relative to similarly rated peers. The company's core business
lines generate a ROA of between 80 and 100 bps any given quarter,
in line with Fitch's expectations and at levels that generate
reasonable capital. For instance, FHN's regional bank has generated
a return on period-end assets of well-over 1% over the last five
quarters, showing great strength in the regional bank
franchise.
Fitch anticipates that FHN's core business lines will continue
to be reasonably profitable going forward. However, given the
sustained low, short-term rate environment, Fitch expects the
bank's NIM to remain challenged and the capital markets business to
struggle to hit the $1 million ADR goal of management's. This
expectation is embedded in FHN's current rating of 'BBB-'.
Furthermore, Fitch expects that performance on a consolidated
basis will continue to substantially lag higher rated peers due to
the additional costs associated with the company's former legacy
business strategy. FHN's nonstrategic book, while now marginally
profitable, still necessitates a higher level of credit costs and
overhead expense and will be a drag on the bank's consolidated
earnings as long as it is a meaningful percentage of total assets
(above 5%).
Asset quality, while improving, continues to weigh on FHN's
rating and overall risk profile. NPAs have been reduced to under
3.0% but will remain elevated compared to peers given their nature.
Accruing TDRs, which make up nearly half of the company's NPAs,
primarily consist of stickier consumer-related restructured loans
that will most likely weigh down asset quality metrics over the
long-term. Fitch views the level of home equity loans that will
reset over the rating horizon as a constraint for upward rating
movement. While Fitch does not believe capital will be
significantly or materially impacted, credit costs and
nonperforming loan inflows will likely remain elevated as borrower
payments reset from interest only to principal and interest.
RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT
Fitch believes FHN's ratings are reasonably situated at 'BBB-'
given core business results and franchise strength.
Fitch will continue to monitor and assess FHN's legal risk. To
the extent that the company continues to need to take outsized
charges that result in material capital deterioration, negative
rating action could be taken, although this is not expected.
Material capital deterioration could mean that core capital levels
drop to the bottom quartile of the peer group.
Given continued expectations that core earnings will be in-line
with similarly rated peers, upward rating movement is unlikely over
the near to mid-term. However, over the long-term, to the extent
that FHN is able to maintain capital at adequate levels, reasonably
manage legal risk and credit risk and improve earnings performance,
positive rating action could be taken.
KEY RATING DRIVERS - HOLDING COMPANY
The IDR and VR of FHN is equalized with its operating company,
First Tennessee Bank, NA, 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 subsidiaries.
RATING SENSITIVITIES - HOLDING COMPANY
FHN's parent currently has a double leverage ratio in excess of
120%. When double leverage exceeds 120%, Fitch has some discretion
to notch the holding company down below its bank subsidiary.
However, given that the bank has significant capital levels and
that both the bank and holding company have shown the ability to
access the capital markets, Fitch has not deemed it necessary to
take such an action. Furthermore, the holding company currently has
four quarters of coverage in cash, which aids in meeting near-term
obligations.
Should FHN's holding company begin to exhibit signs of weakness,
demonstrate trouble accessing the capital markets, or have
inadequate cash flow coverage to meet near-term obligations, there
is the potential that Fitch could notch the holding company IDR and
VR from the ratings of the operating companies.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
FHN has a Support Rating of '5' and Support Rating Floor of
'NF'. In Fitch's view, FHN is not systemically important and
therefore, the probability of support is unlikely. IDRs and VRs do
not incorporate any support.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING
FLOOR
FHN's Support Rating and Support Rating Floor are sensitive to
Fitch's assumption around capacity to procure extraordinary support
in case of need.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID
SECURITIES
Subordinated debt and other hybrid capital issued by FHN and by
various issuing vehicles are all notched down from FHN or its bank
subsidiaries' VRs in accordance with Fitch's assessment of each
instrument's respective non-performance and relative loss severity
risk profiles.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID
SECURITIES
The ratings of subordinated debt and other hybrid capital issued
by FHN and its subsidiaries are primarily sensitive to any change
in FHN's VR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
FHN's uninsured deposit ratings are rated one notch higher than
the company's IDR and senior unsecured debt because U.S. uninsured
deposits benefit from depositor preference. U.S. depositor
preference gives deposit liabilities superior recovery prospects in
the event of default.
KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT
RATINGS
The ratings of long- and short-term deposits issued by FHN and
its subsidiaries are primarily sensitive to any change in FHN's
long- and short-term IDRs.
Fitch affirms the following ratings:
First Horizon National Corporation
--Long-term IDR at 'BBB-'; Outlook Stable;
--Viability at 'bbb-'';
--Short-term IDR at 'F3';
--Senior at 'BBB-';
--Preferred stock at 'B';
--Support at '5';
--Support Floor at 'NF'.
First Tennessee Bank, N.A.
--Long-term IDR at 'BBB-'; Outlook Stable;
--Viability at 'bbb-';
--Short-term IDR at 'F3';
--Long-term deposits at 'BBB';
--Short-term deposits at 'F3';
--Short-term debt at 'F3';
--Senior debt at 'BBB-';
--Subordinated debt at 'BB+';
--Preferred stock at 'B';
--Support at '5';
--Support Floor at 'NF'.
First Tennessee Capital II
--Preferred stock at 'B+'.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Banking Quarterly comment: 4Q14' (Jan. 28, 2015);
--'U.S. Banks: The Risks with Energy Slide' (Jan. 16, 2015);
--'U.S. Basel III and Dodd Frank Act Regulatory Guide' (Nov. 21,
2014);
--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate
Environment)' (Nov. 12, 2014);
--'U.S. Banks: Implications of an Interest Rate Shock Scenario'
(Oct. 30, 2014);
--'U.S. Banks: Liquidity and Deposit Funding (Aug. 8, 2013);
--U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)
(June 18, 2013);
--'U.S. Bank Mergers and Acquisitions -- When Will The Catalysts
Kick In? (July 11, 2013);
--'Index Trend Analysis - 4Q14 (Fitch Fundamentals Index Remains
Neutral)' (Jan. 15, 2015);
--'Risk Radar Global 3Q14' (Sept. 15, 2014);
--'Global Financial Institutions Rating Criteria' (Jan. 31,
2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10,
2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities
Criteria' (Jan. 31, 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March
27, 2014);
--'Rating Considerations for U.S. Bank Holdco & Opcos'
(Update on Position Outlined in 1Q14) (Dec. 1, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978958
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Fitch RatingsPrimary AnalystBain K. Rumohr, CFAAssociate
Director+1 312-368-3153Fitch Ratings, Inc.70 West Madison
StreetChicago, IL 60602orSecondary AnalystJulie SolarSenior
Director+1 312-368-5472orCommittee ChairpersonChristopher
WolfeManaging Director+1 212-908-0771orMedia Relations:Alyssa
Castelli, +1 212-908-0540alyssa.castelli@fitchratings.comElizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com