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First Horizon's Long Road Back

The company originally began selling branches located outside of its home state in late 2007 -- giving priority to its in-state bank subsidiary First Tennessee Bank, with 180 branches even then -- and it's toiled throughout the crisis to get out from under troubled home equity and construction and industrial loans, a task that continues to this day. That said, it did make it through the crisis and there are more bright spots than blemishes on its balance sheet these days.

New management gets plenty of credit for the bank's survival. Longtime CEO Jerry Baker announced his retirement in 2008, naming Bryan Jordan, the former CFO at First Horizon (and previous finance head at Regions Financial (RF - Get Report)) to succeed him in September of that year. Losch himself started at the company in early 2009, after his predecessor employer, Wachovia, was acquired by Wells Fargo (WFC - Get Report), where he was the CFO for Wachovia's main banking subsidiary.

William 'BJ' Losch
William 'BJ' Losch, First Horizon's chief financial officer.

But while the surprise second-quarter profit was attributable to improved credit costs as the bank's loan loss provision fell for a fifth straight quarter, First Horizon wasn't able to release any reserves, like many institutions did in the second quarter.

Nonperforming loans totaled $790.5 million at quarter's end, and the bank said its commercial real estate income loan portfolio continues to show stress. Another issue is its bailout tab. First Horizon accepted $866 million in funding from the U.S. Treasury's Troubled Asset Relief Program, and despite some speculation about paying it back earlier this year, it's yet to do so.

The decision by Keefe, Bruyette & Woods to lower its rating on the stock in the wake of the second-quarter report illustrates the conflict that seems to be holding the shares back. The firm likes the bank's long-term prospects, and said it views it as one of the best capitalized banks in the Southeast U.S. with a strong management team that "will one day turn its excess capital into additional EPS power," but it still cut its assessment to "market perform," trimmed its 12-month price target to $14, and lowered earnings estimates for 2010 and 2011.

CFO Losch says First Horizon is much more focused on returns and profitability as opposed to growth right now. The bank has set long-term targets for a 15% to 20% return on equity; a return on assets between 1.25% to 1.45% and a tangible common equity to tangible asset ratio between 6% and 7%, according to company presentation materials. It expects to achieve those goals with a continued focus on efficiency.

"If you look back over the last several years for us and for the industry, everybody was growing their earnings per share or P/E multiple through growth. That dynamic certainly has shifted," Losch says.

He continued: "Theoretically, if you're focusing your company on driving returns, you could have low or no growth and still have high returns on equity year in and year out by being efficient, by driving revenue per FTE full-time employee , by taking costs out of the organization and so on. We've had that mindset for 12-18 months. I think that foundation of thought is going to serve us well."

Sandler O'Neill analyst Kevin Fitzsimmons thinks First Horizon is on its way to changing investor perception so it will be seen as belonging to "the camp of strong, profitable, capital-rich regional names positioned to be consolidators over the next few years," he told clients in a recent note.

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