First Horizon, First in the Hearts of Investors

A few weeks back, The Motley Fool's Rich Smith had the chance to speak with Gerald Baker, CEO of Motley Fool Income Investor recommendation First Horizon (NYSE: FHN). Our Income Investor subscribers have already had the chance to hear Jerry's thoughts on his bank, the ongoing crisis in the mortgage industry, and the chances that Tennessee will triumph at Super Bowl XLII. Now you can, too. What follows is an excerpt from the interview.

Rich Smith: Jerry, First Horizon is a bank, but there's all types of banking -- investment banking and passbook savings, home loans and business loans, online banking, online brokering, and much more. What kind of bank are you?

Gerald Baker: First Horizon is a financial services company with three main components: First Tennessee Bank (the largest part), our First Horizon Home Loans national mortgage business, and our FTN Financial capital markets business. First Tennessee Bank is in many ways a traditional retail and commercial bank, with trust, wealth management, and cash management services. Much of First Tennessee's business is in Tennessee, where we have the largest consumer and business market share. Additionally, the bank engages in banking and commercial real estate lending on a broader regional and national basis.

Smith: Almost simultaneously with James Early picking your bank as a recommendation for Income Investor subscribers, I personally stumbled across a First Horizon subsidiary while penning a column entitled "Get to Know a Guru." In that piece, I observed that your FTN Midwest Securities subsidiary is one of the best stock pickers out there -- in the top 10% of rated players on Motley Fool CAPS, as a matter of fact. How important is brokerage to your business?

Baker: FTN Financial, which includes equity research through FTN Midwest Securities, is one of the three key parts of our business. FTN Financial also includes fixed-income security trading, investment banking, and structured finance. This group gives us access to a different customer base and the secondary markets on Wall Street, with more than 1,500 institutional clients nationally. We believe our equity analysts like Chuck Cerankosky, Jeff Davis, and Mark Muth, who were recognized recently as among the best at stock picking, contribute greatly to our business.

Smith: Last summer, I had the opportunity to chat with a certain hedge fund advisor, John Mauldin, on the subject of the inverted yield curve and how it can predict recessions in the broad economy. For you, I've got a more basic question, and one of perhaps more specific interest to Income Investor subscribers who own your stock: What does an inverted yield curve do to your business, and how long after the curve, er, un-inverts do things typically start turning around for you?

Baker: The yield curve does impact our mortgage and fixed-income capital markets businesses. The inverted relationship between long-term and short-term rates (typically longer-term rates have an increasingly higher yield [compared] to short-term rates) has taken substantial income out of these businesses, and the inversion has lasted far longer than expected. As the relationship between short-term and long-term rates returns to a more normal range, the shape of the curve -- how steep it is -- and the amount of volatility within given periods will determine how quickly mortgage and fixed income improve.

Smith: I read an interview you did with the Memphis Business Journal earlier this year, in which you were asked about rumors that First Horizon had been in talks to sell itself to Wachovia (NYSE: WB), Wells Fargo (NYSE: WFC), or a similar bigger bank. Back then, your response was, and I quote: "Unequivocally, none. None. Zero. Zilch. None. Zip." Any change in that?