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VOL. 127 | NO. 142 | Monday, July 23, 2012

First Horizon Reports Q2 Loss

By Andy Meek

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The Memphis-based parent company of First Tennessee Bank swung as expected to a second-quarter loss Friday, July 20, over mortgage buyback demand from Fannie Mae and Freddie Mac.

The company’s provision for loan losses also soared from $1 million during Q2 2011 to $15 million during the second three months of 2012.

The Q2 net loss – the first after several straight quarters of profit – to First Horizon National Corp.’s common shareholders was $124.8 million, or $0.50 per diluted share. That’s a reversal from one year ago, when the company notched a nearly $20 million quarterly profit equal to $0.06 cents per share.

Analysts on average had been expecting a loss equal to $0.49 cents per share. A previously announced pre-tax charge of $272 million related to litigation reserves and mortgage repurchase requests from government-sponsored entities was the main driver of the second quarter’s pre-tax loss of $211 million. Fitch Ratings downgraded First Horizon’s credit rating after that announcement.

During Q2 2012, the company’s banking unit – the largest based in Tennessee – grew revenue 3 percent from the first to second quarter. That was driven by higher fees and net interest income. Period-end loans and average deposits in the bank also both grew 3 percent from the first to second quarter.

The company’s capital markets subsidiary, FTN Financial, remains a major contributor to fee income for First Horizon, and during Q2 it had average daily revenue of $1.1 million. And First Horizon’s efforts to continue cutting loan balances in its non-strategic segment, coupled with increased loans in its banking unit, resulted in a 1 percent drop in consolidated average loans.

“Our company continues to generate solid results in our regional bank through First Tennessee and our capital markets group through FTN Financial, and our employees continue to win new business, improve the way they serve our customers and work more efficiently at every turn,” said First Horizon chairman, president and CEO Bryan Jordan. “We are pleased with the progress our folks have made on our efforts to position us for the future including technology investments and the continued wind-down of our non-strategic businesses.”

In an analyst note to clients distributed after First Horizon’s earnings were announced Friday, Wunderlich Securities Inc. bank analyst Kevin Reynolds said the company’s results were impacted by increased reserves and pending litigation because of additional GSE-related mortgage repurchase demands and how that improves the “long-term outlook for the company, when combined with the solid performance of the core bank.”

Reynolds also noted that First Horizon reported strong core results, higher loan balances and net interest margin, improving asset quality and continued high capital levels.

“The company reported a (Q2) loss per share of $0.50, essentially in line with consensus and a little better than our $0.52 loss per share estimate,” Reynolds said. “As expected, First Horizon’s results were impacted by increased reserves and pending litigation due to additional GSE-related repurchase demands, which improves the long-term outlook for the company when combined with the solid performance of the core bank. Our $13 price target reflects our expectation that First Horizon will continue to improve its bottom line performance as it emerges from this credit cycle.”

The company repurchased $36.9 million in shares in the second quarter, leaving $74.5 million available under the company’s $200 million stock repurchase program.

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