First Horizon National Corp. may be paring expenses and scaling back its retail growth to improve earnings, but it also is looking at low-cost ways to expand its loan book and boost revenue.
To that end, the $38.8 billion-asset Memphis company formed a food and beverage finance group last month to focus on companies with large franchisee networks. The group's early clients include Burger King, Wendy's, and Popeye's franchise owners, as well as the beer and wine distributor Empire Distributors Inc.
The group's objective is to provide loans of $5 million to $20 million for store openings, equipment finance, and acquisitions.
Scott Deviney, the senior vice president in charge of the food and beverage group, said in an interview last month that First Horizon realized franchise finance was a way to expand the loan portfolio without massive overhead. For now the group has only two full-time employees, but it generated $35 million of loan commitments in its first month. He said he expects it to make $100 million of loans a year.
Increasing loans at a relatively low cost is vital for First Horizon, which is trying to cut annual expenses by $140 million by yearend. It has slowed down a once-aggressive branch expansion that relied on mortgage offices as a lead-in to full-service banking in numerous large cities.
"We're trying to become a more efficient company and make sure this is the right thing for the bank," Mr. Deviney said.
The food and beverage group plans to focus on the Southeast, and markets such as northern Virginia, Dallas, and Nashville hold particular promise for growth, he said. "The grand plan would involve having people on the ground in many local markets, but we won't hire anyone else until we can justify it."
Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said in an interview Monday that the group's formation is indicative of a larger transformation at First Horizon, which is looking at ways to cut costs and increase revenue at the same time. "They are evaluating every business line from the perspective of return on investment," he said.
In franchise lending, First Horizon is vying for business in an industry that generates about $1.53 trillion of goods and services a year in areas such as restaurants and lodging, according to the International Franchise Association.
The competition is tough — Bank of America Corp., Sovereign Bancorp Inc., SunTrust Banks Inc., and a number of specialized lenders are already entrenched in the business. B of A in particular has singled out the business for growth. It formed a banking group this year to lend to middle-market franchisees, which it defines as those with annual revenue of $2.5 million to $20 million. The $1.5 trillion-asset Charlotte company lends to larger franchisees through Eagle Franchise Finance Funding LLC, which it obtained through its 2004 purchase of FleetBoston Financial Corp., and a restaurant finance group in Atlanta.
SunTrust's franchise lending business evolved from its long-standing relationship with Coca-Cola Co. Mr. Deviney, who left SunTrust in 2004 after 10 years there, said when he left the $186.4 billion-asset Atlanta company it had nearly $2 billion of franchise-related loans, about half of them to Coca-Cola bottlers and distributors.
Christopher Marinac, an analyst at FIG Partners LLC in Atlanta, said in an interview that it makes sense for First Horizon to launch its own group in that city, where Coca-Cola's presence has spurred a large franchise industry. He sees the group's formation as a positive step, "in that they are trying to grab market share in a higher-margin business" that could lead to other small-business opportunities.
Mr. Deviney acknowledged that the environment is competitive, much as it is for any other type of loan. But he also said the "riskier perception" tied to franchise lending still allows his group to make loans at 75 basis points to 300 basis points above the London interbank offered rate, depending on the industry. "Sometimes you can get more than that."
First Horizon has established certain guidelines meant to mitigate its risk, including leverage multiples less than four times earnings before interest, taxes, depreciation, and amortization, he said. It also will avoid fine dining, which is susceptible to recessions, and it prefers to lend to franchisees with at least five locations.
"Over the long haul, we should be safer than most other lenders," Mr. Deviney said.
Mr. Patten said underwriting would be critical to the group's success. "Franchises have a high failure rate … but if you can find the right bankers with the right level of expertise, you can get a good return in that business," he said.
Mr. Deviney said that First Horizon expects to pick up investment banking business through the franchise business, noting that the company has an analyst covering eight restaurant groups.
