VOL. 127 | NO. 132 | Monday, July 09, 2012
First Horizon Likely to Post Negative Q2
By Andy Meek
The Memphis-based parent company of First Tennessee Bank is likely to break a string of profitable quarters when the company makes its second-quarter earnings presentation in a few weeks.
That’s the consensus of 22 analysts forecasting what First Horizon National Corp. might report July 20 for Q2. It follows an announcement by management in late June that the company expects to take a hit on its Q2 earnings because of increased mortgage repurchase and litigation charges for the quarter totaling about $272 million.
Most of that will be used to boost the bank’s reserves for mortgage repurchase exposure to Fannie Mae and Freddie Mac.
Analysts’ Q2 earnings estimates for First Horizon range from a loss of 32 cents to a loss of 63 cents. However, analysts at this point are unanimously forecasting a profitable third quarter for the company, and most analysts are predicting a profitable full-year 2012 for the company.
A few analysts don’t see the charge First Horizon expects to book in Q2 as carrying too much negative impact.
“First Horizon … announced that it expects to incur a $272 million pretax charge in the second quarter, with $250 million related to mortgage repurchase requests from Freddie Mac and Fannie Mae,” said Morningstar Inc. analyst Maclovio Pina in an analyst note following the First Horizon announcement June 25. “This charge will more than double the bank’s previous reserve balance, and management thinks it will largely cover any future claims from the two (government-sponsored enterprises).
“This noncash provision is larger than what we anticipated in our best-case scenario, and it will push the company’s 2012 bottom line into the red. However, after taking another look at our assumptions … the negative impact on our $11 fair value is not enough to meaningfully move the needle. What most likely will be shelved for the time being is a significant hike in the firm’s dividend, in our opinion.”
Similarly, Wunderlich Inc. analyst Kevin Reynolds noted that the loss clears up a factor affecting the company’s balance sheet that previously had not been fully quantified.
“We maintain our Buy rating on shares of First Horizon National Corp. as well as our $13 price target after the company announced it expects to incur 2Q12 pre-tax charges as a result of mortgage repurchase exposure and pending litigation due to additional (government sponsored enterprise)-related repurchase demands,” Reynolds wrote in an analyst note of his own. “With this announcement, the previously unknown loss potential relating to mortgage repurchase risk has been quantified, and as ugly as it is for 2Q12, it is not thesis-changing.”
According to Fitch Ratings, recent announcements by First Horizon, PNC Bank and SunTrust Banks Inc. that they intend to increase their reserves against additional Fannie Mae and Freddie Mac repurchase claims suggest those government-sponsored entities may be “sharpening their focus” on regional banks.