Fitch Affirms First Horizon National Corp.'s IDRs at 'BBB-'; Outlook Stable
12:11 PM ET | BusinessWire
Fitch Ratings has affirmed the Long-term and Short-term Issuer Default Ratings (IDRs) of First Horizon National Corporation (FHN) and its subsidiaries at 'BBB-/F3'. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release.
FHN's Stable Outlook and ratings affirmation follows the company's announcement Friday that it had provided an additional $200 million to its mortgage repurchase reserve. The reserve increase is related to FHN reaching a deal in principal with Fannie Mae (FNMA) surrounding a carve-out loans FHN sold to the GSE from 2000 - 2007.
The affirmation of the company's IDRs reflects Fitch's view that FHN is well-situated at 'BBB-' given its solid franchise in the Southeast, the solid capital generation capabilities of its core businesses, and management's efforts to wind down the nonstrategic loan portfolio while minimizing losses
KEY RATING DRIVERS - IDR and VR
In Fitch's view, reserves available to address GSE-related repurchase risk should be adequate going forward given the additional information FHN received from FNMA as well as the agreement in principal is has made with FNMA. FHN has communicated that it has had limited visibility as to the buy-back potential for loans sold to Freddie Mac (FHLMC), and therefore has needed to extrapolate information from FNMA to its FHLMC sold loan pool in order to arrive at amounts included in the mortgage repurchase reserve.
Management expects to obtain a clearer view of what it can expect from FHLMC going forward. FHN has disclosed that $213 million of the $293 million repurchase reserve has been set aside for the remaining FHLMC estimate, bulk servicing sales, future mortgage insurer rescissions and other potential mortgage-related charges.
Fitch notes that while the announced provision will essentially wipe out two quarters of earnings, capital remains adequate relative to similarly rated banks and above management's long-term capital targets. At 3Q'13, FHN had an estimated Basel III capital equity tier 1 (CET1) of between 9.7% and 9.8%, inclusive of the mortgage repurchase reserve build, compared to management's goal of between 8.0% and 9.0%. In order to build capital levels, management announced that it would be re-evaluating the continuation of its current share repurchase program. Fitch's expectation that FHN will be able to maintain capital at reasonable levels relative to its risk profile is incorporated in today's affirmation and maintenance of the Stable outlook.
Outside of the quarter's outsized charge, FHN's core business lines have maintained adequate performance relative to similarly rated peers. The company's core business lines generated an ROA of 80 bps during 3Q'13, in line with prior periods and within Fitch's expectations. Fitch anticipates that core business lines will continue to be profitable but likely somewhat constrained given the sustained low, short-term rate environment.
RATING SENSITIVITIES - IDR and VR
Fitch believes FHN's ratings are well-situated at 'BBB-' given core business results and franchise strength. However, Fitch notes that FHN is still subject to elevated legal risk related to prior mortgage practices. Outside of loans sold to the GSEs, FHN is being investigated by the Housing and Urban Development (HUD) and the U.S. Department of Justice (DOJ) relating to the underwriting of FHA loans.
Furthermore, FHN originated and securitized $27 billion of PLS between 2005 and 2008, and although the company has not received any repurchase requests to date, it 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.
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.
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, resolve existing mortgage-related legal risk and improve earnings performance, positive rating action could be taken.
KEY RATING DRIVERS AND RATINGS SENSITIVITIES - SUPPORT RATING AND 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.
KEY RATING DRIVERS - 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.
RATINGS SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Given that subordinated debt and other hybrid capital issued by FHN, and its subsidiaries First Tennessee Bank, NA (FTBNA) and First Tennessee Capital II are all notched down from FHN's VR of 'bbb-', their ratings are primarily sensitive to any change in FHN's VR.
SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND RATING SENSITIVITIES
The ratings listed below 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 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';
--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.
In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.
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. 05, 2012).
--'Risk Radar' (Apr. 4, 2013);
--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013)
-'U.S. Banks: Liquidity and Deposit Funding (Diminishing QE Effectiveness and its Impact on Systemic Liquidity and Funding)' (Aug. 8, 2013);
--'U.S. Bank Mergers and Acquisitions' -- When Will The Catalysts Kick In? (July 11, 2013)
--'U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014' (April 29, 2013)
--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);
--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);
--'Global Banks: FHFA Lawsuit Settlements (Cost of Settling Looks More Expensive after UBS)' (August 14, 2013)
--'U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves; Uncertainty Remains)' (Aug. 20, 2012);
--'Private-Label Representation and Warranties' (July 27, 2011).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805613
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SOURCE: Fitch Ratings
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