S&P Revises Outlook on First Horizon National (FHN) to Positive on DoJ, HUD Agreements

Standard & Poor’s Ratings Services today affirmed its ratings on First Horizon National Corporation (NYSE: FHN) and its bank subsidiary First Tennessee Bank N.A. Memphis, including the long-term issuer credit ratings of ‘BB+’ and ‘BBB-‘, respectively. We are also revising the rating outlook on both entities to positive from stable.

"The outlook revision to positive reflects our view that the Agreement in Principle between FHN and the DOJ and HUD represents a significant milestone toward resolving outstanding mortgage litigation and improving the overall risk profile of the company," said Standard & Poor's credit analyst Richard Zell.

We believe this agreement, which we expect will be finalized during the second quarter, will likely resolve the material litigation risks associated with FHN’s legacy mortgage underwriting and origination business that it sold in late 2008. The agreement is likely to require that FHN make a $212.5 million cash payment to settle the DOJ/HUD investigation into underwriting and mortgage origination practices for a specific subset of loans that the FHA insured. During 2014, FHN provisioned $50 million in anticipation of an eventual settlement.

Although improving, we believe that FHN’s risk profile remains somewhat worse than peers, primarily as a result of the currently high level of nonperforming assets (NPAs), as well as the bank’s sizable “nonstrategic” loan portfolio (largely home equity loans). Nevertheless, we believe that strategic actions by management will lead to lower loan portfolio risk over the next few years, which supports our positive rating outlook.

We may raise the rating if we believe that FHN's overall risk profile has improved relative to peers. Additionally, we could raise the rating on FHN if we believe that the firm is committed to rebuilding its capital levels such that we expect the projected RAC ratio to exceed 10% on a sustained basis.

We could revise the rating outlook to stable if there is evidence of an increase in the bank’s risk appetite, or if the loan portfolio experiences deterioration. In addition, we could revise the outlook to stable if the company does not rebuild capital to a level we deem as “strong” under our criteria. Lastly, we could revise the outlook to stable if the firm’s existing legal matters involving legacy mortgage underwriting and originations result in substantial additional provisioning, which we do not expect.

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