First Horizon's Homebody Period May End Soon

D. Bryan Jordan used the "e" word this week, but he urged likely skeptics not to dismiss First Horizon Corp.'s willingness to revisit expansion as a strategic U-turn.

Jordan, the company's chief executive, told attendees at a New York conference hosted by Barclays Capital that First Horizon would consider opening branches in markets outside Tennessee just two years after it retreated to its home state.

Any out-of-state growth plan would be much more conservative than the push made by a prior management team, sticking to states adjacent to Tennessee, Jordan said. Expansion would involve only "local markets that look and feel a lot like the major markets in Tennessee," he said.

Analysts said the $26.3 billion-asset company's expected approach to acquisitions, which will likely focus on midsize cities that resemble its current markets, should serve as a template for other banks eyeing expansion in coming years.

"I think their plan is well thought out," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "This is a strategic and careful approach to expansion, where they're looking to build franchise value."

Fitzsimmons said Jordan told a group of investors while in New York that markets he would consider include Birmingham, Ala.; Huntsville, Ala.; Louisville, Ky.; and Tupelo, Miss. "They're not looking to go all over the nation by any means," Fitzsimmons said.

Such a plan would be a departure from the expansion course charted by the former chairman and CEO, Kenneth Glass, in 2004. At that time, First Tennessee National Corp. rebranded itself as First Horizon and began an aggressive expansion by converting mortgage offices into branches. Over three years it entered northern Virginia, Baltimore, Atlanta and Dallas. Executives also considered such far-flung markets as Denver, Phoenix, San Francisco and Seattle.

By 2008, the expansion fizzled as First Horizon struggled with emerging issues in its national mortgage and home-builder portfolios and found it difficult to adequately fund its newly opened branches. So the company decided to scale back to focus on Tennessee, selling three dozen branches to rivals such as M&T Bank Corp. and Fifth Third Bancorp.

Hired as First Horizon's chief financial officer in April 2007, Jordan played a key role in the pullback, addressing credit quality, cutting costs and fixing problems with the balance sheet. He became the Memphis company's CEO in September 2008.

"They know they have to do things differently, because the last expansion was an effort to chase growth at all costs," said Kevin Reynolds, an analyst at Wunderlich Securities. First Horizon believes it can build market share at a lower cost under the new strategy, Reynolds said. Ten 10 branches could cover Huntsville as opposed to 100 or more in Atlanta, he said.

A deeper look at the markets would support the theory. The biggest bank in Huntsville is Regions Financial Corp., which had 22 branches and deposits of $1.78 billion in mid-2009, according to the latest data from the Federal Deposit Insurance Corp. Tupelo has a total of nine banks and $1.3 billion in total deposits, with BancorpSouth handling $510 million of deposits, or nearly 40% of the market.

In comparison, $2 billion in deposits would barely gain a bank 2% share in Atlanta, where 11 banks have 20 or more branches.

Jordan said that given changing capital rules, a harsher regulatory environment and stressed balance sheets, a list of acquisition candidates could be long. "It's our view that we'll see a fair amount of [consolidation] over the next year or so," Jordan said before pausing and extending the time line out to the "next three to four years."