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First Horizon's Ratings Affirmed by Moody's, Outlook Stable

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Ratings of First Horizon National Corporation (FHN - Free Report) and its bank subsidiary, First Tennessee Bank, National Association have been affirmed by Moody’s Investors Service. Also, the outlook was left unchanged at stable.

Moody's affirmed the subsidiary’s baa2 standalone baseline credit assessment. Also, it has been rated A3/Prime-2 for long- and short-term deposits. On the other hand, the parent company has a long-term issuer rating and a senior unsecured rating of Baa3.

The ratings agency also assigned provisional ratings to First Horizon's shelf registration. The shelf was rated (P)Baa3 for senior unsecured, (P) Baa3 for subordinate, (P)Ba1 for junior subordinate, (P)Ba1 for cumulative preferred stock and (P)Ba2 for non-cumulative preferred stock.

Reasons Behind the Affirmation

First Horizon's improved asset risk as well as its solid core retail banking franchise in Tennessee, which supports its core deposit funding profile is the key reason behind the ratings confirmation.

The company's asset risk has improved as witnessed by falling problem loans and run-off in its nonstrategic loan portfolio, which mainly consists of national home equity exposure from its legacy mortgage business. Per Moody's, the merger of Capital Bank is considered as a credit positive development and indication of a conservative credit culture.

Also, Moody’s found First Horizon’s credit quality to have improved in the recent years, especially credit losses and net charge-off ratio. Further, the ratings agency feels that First Horizon’s profitability, which was previously impacted by acquisition-related costs and low interest rate, is not displaying improvement. However, it still lags the similarly-rated U.S. regional bank peers.

Moody’s finds First Horizon's funding profile to be impressive as it is supported by solid core deposit funding, which fully funds the loan portfolio and reflects the strength of its dominant market position in home state of Tennessee. First Horizon, which acquired Capital Bank in November 2017, saw deposit growth of 6.7% in 2018, attributable to the success of deposit campaigns in its newer markets.

On the downside, ratings reflect weaker capitalization and profitability than peers. After analyzing its capital deployment activities, Moody’s is of the opinion that First Horizon seeks to operate at the low end of its CET1 ratio target range of 9.5-10%, i.e., lower than its peers.

Factors That Might Trigger Change in Ratings

An upward ratings change can happen if the company is able to improve and maintain capitalization and demonstrates bondholder-friendly approach to capital management while maintaining good asset quality performance.

On the other hand, downward rating pressure could emerge from further weakening in First Horizon's capitalization and/or significant deterioration in asset quality in either its originated portfolio or acquired portfolio.

Shares of the company have lost 15.4% over the past six months compared with 13.3% decline recorded by the industry it belongs to.

First Horizon currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

DNB Financial Corp (DNBF - Free Report) has witnessed slight upward estimate revisions over the past 30 days. Moreover, the stock has appreciated more than 19% over the past year. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

City Holding Company (CHCO - Free Report) has witnessed 12% upward estimate revisions for the past 30 days. Additionally, the company’s shares have gained 11.3% over the past year. It sports a Zacks Rank of 1, at present.

Popular, Inc. (BPOP - Free Report) has witnessed 2.4% upward estimate revisions for the past 30 days. Additionally, the company’s shares have rallied 36.2% over the past year. It holds a Zacks Rank of 2, at present.

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