Increase in reserves for government-sponsored entities (GSE)
mortgage repurchases have resulted in
First Horizon National Corp.
) reporting a loss in the second-quarter of 2012, following five
consecutive quarters of profit.
First Horizon reported a loss available to common shareholders
of $124.8 million or 50 cents per share, in line with the Zacks
Consensus Estimate. The company had earned $30.5 million or 12
cents per share in the prior quarter and $20.0 million or 6 cents
per share from continuing operations in the year-ago quarter.
Besides the increased provisions for mortgage buybacks, the
company also made litigation-related accruals. As a result, First
Horizon incurred a pre-tax charge of $272 million for GSE-related
mortgage repurchase and litigation reserves. Together, the
provisions resulted in a negative impact of 67 cents per share on
the company's earnings.
Revenue came in at $331.6 million, below the Zacks Consensus
Estimate of $359 million. The revenue figure also fell 11%
sequentially and 8% year over year. While net interest income
remain relatively flat both sequentially and year over year,
decline in non-interest income primarily pulled the revenue figure
Also, provision for loan losses reported an increase to $15
million from $8 million reported in the prior quarter and $1
million reported in the year-ago quarter.
Quarter in Detail
Net interest income was relatively flat both sequentially and
year over year at $172.7 million. Net interest margin moved up 4
basis points (bps) sequentially to 3.16%. However, from the
prior-year quarter, net interest margin reported a 4 bps
Non-interest income slipped 24% sequentially and 18% year over
year to $153.8 million. Non-interest expense increased 64%
sequentially and 53% year over year to $527.2 million.
Period-end loans were up 1% both sequentially and year over
year. Though total deposits fell 5% sequentially, it advanced 1%
year over year.
Credit trends continued to improve, but at a slower rate.
Allowance for loan losses were down 7% sequentially and 39% year
over year to $321.1 million. As a percentage of period-end loans on
an annualized basis, allowance for loan losses were 1.98%, down 19
bps from the prior quarter and 128 bps year over year.
Net charge-offs were down 14% sequentially and 39% year over
year to $40.0 million. As a percentage of average loans and on an
annualized basis, net charge-offs were 1.01%, down 15 bps
sequentially and 66 bps year over year.
Non-performing assets fell 9% sequentially and 38% year over
year to $466.9 million. As a percentage of period-end loans plus
foreclosed real estate and other assets, non-performing assets were
2.32%, down 24 bps sequentially and 177 bps year over year.
Evaluation of Capital
First Horizon's capital ratios declined in the reported quarter.
Tier 1 capital ratio decreased to 13.10% from 14.36% in the prior
quarter and 14.39% in the year-ago quarter. Tangible common equity
ratio fell 57 bps sequentially and 80 bps year over year to 8.13%.
Also, book value came in at $8.92 per share, down from $9.42 per
share in the prior quarter and $9.05 in the year-ago quarter.
Capital Deployment Update
On July 17, the board of directors of First Horizon approved a
quarterly cash dividend of 1 cent per share. The dividend is
payable on October 1 to common shareholders of record on September
During the reported quarter, First Horizon bought back $36.9
million in shares. Following this, the company had $74.5 million
available under its $200 million stock repurchase program.
The Mortgage Repurchase Reserve Issue
We believe mortgage repurchase expense will continue to remain
an overhang for First Horizon. While the company sold its mortgage
origination and servicing platforms in 2008, it bears the liability
for the conforming conventional mortgage loans purchased by the
GSEs from First Horizon that were originated over many years till
Besides First Horizon,
PNC Financial Services Group Inc.
) has also beefed up its residential mortgage repurchase reserves
by a significant amount in the second quarter following the
recently elevated levels of GSE-related repurchase demands.
In fact, a number of big Wall Street banks have suffered
billions in losses for costs associated with such activities.
Besides First Horizon and PNC Financial,
Bank of America Corp.
) is also experiencing increased demands for mortgage repurchases
from the GSEs.
Though the winding down of the non-strategic part of the loan
portfolio bodes well, it will remain a drag on First Horizon's
earnings going forward. A shrinking revenue base and regulatory
issues, tepid economic recovery along with a low interest rate
environment and mortgage exposure serve as headwinds for the
Yet First Horizon's endeavor to lower its exposure to problem
loans is impressive. The company is also aiming at controlling
costs and improving long-term profitability by focusing on growing
its core Tennessee banking franchise, which would augur well going
forward. Moreover, share buybacks give a boost to investors'
confidence in the stock.
Among First Horizon's peers, both
Regions Financial Corporation
Synovus Financial Corp.
) will release their second-quarter 2012 earnings on July 24.
First Horizon retains its Zacks #3 Rank, which translates into a
short-term Hold rating.
BANK OF AMER CP (BAC): Free Stock Analysis
FIRST HRZN NATL (FHN): Free Stock Analysis
PNC FINL SVC CP (PNC): Free Stock Analysis
REGIONS FINL CP (RF): Free Stock Analysis
SYNOVUS FINL CP (SNV): Free Stock Analysis
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