First Horizon National Corporation (FHN)

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First Horizon National (FHN)

Q3 2012 Earnings Call

October 19, 2012 9:30 am ET

Executives

Aarti Bowman

D. Bryan Jordan - Chairman, Chief Executive Officer, President, Member of Executive & Risk Committee, Chairman of First Tennessee Bank National Association and Chief Executive Officer of First Tennessee Bank National Association

William C. Losch - Chief Financial Officer, Executive Vice President,Chief Financial Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association

Gregory D. Jardine - Former Chief Credit Officer, Executive Vice President, Chief Credit Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association

Analysts

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Christopher W. Marinac - FIG Partners, LLC, Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Horizon National Corp. Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Aarti Bowman. Ma'am, you may begin.

Aarti Bowman

Thank you, operator. Please note that the press release and financial supplement which announced our earnings, as well as the slide presentation we'll use in this call this morning, are posted on the Investor Relations section of our website at www.fhnc.com.

In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly report.

Our forward-looking statements reflect our views today, and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call, and is reconciled to GAAP information in those materials. Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch. Additionally, our Chief Credit Officer, Greg Jardine, will be available with Bryan and BJ for questions. I'll now turn it over to Bryan.

D. Bryan Jordan

Thank you, Aarti. Good morning, everyone. Thank you for joining our call. During the third quarter, we built on our momentum, continuing to successfully execute on our strategic plan while controlling what we can control. We improved profitability of our core businesses, made headway towards achieving our expense save targets and further strengthen our balance sheet as we reduce non-strategic assets, grew loans and improved credit quality in our core segments.

We're also deploying capital. Since the third quarter of 2011, we've bought back $140 million of common stock, including $15 million in this quarter, and still have $60 million of our share repurchase program remaining.

Our core businesses, regional banking and capital markets, grew pretax pre-provision net revenue by 5% linked quarter. Year-over-year, the regional bank pre-provision pretax net revenue was up 2%, driven by a 7% increase in net interest income.

In capital markets, third quarter fixed income average daily revenues were $1.2 million, up from second quarter 2012's level. FTN Financial's expansive distribution platform and diverse customer base provide solid fee income and strong returns for us. Capital markets return on assets was an annualized 2.3% in the third quarter.

Balance sheet trends were also positive. Average core deposits in the regional bank increased 9% year-over-year. Recently released June 2012 FDIC deposit data illustrates just how solid this growth is across the markets we serve. Even including a planned reduction in our Memphis markets excess wholesale funding, we retained top ranking in our West and East regions, and we continue to make solid progress in middle Tennessee, where we gained 100 basis points of share.

Our regional bank grew average loans 12% year-over-year, keeping loan yields relatively stable despite competitive pricing in our markets. Net interest spread in the regional bank was 354 basis points, up 4 basis points from 1 year ago.

Our loan mix continued to improve as relationship-oriented loan growth in the regional bank more than offset nonstrategic loan run-off in the third quarter. Total consolidated average loans were up 3% year-over-year, driven by a 15% increase in our C&I portfolio.

Consolidated net interest margin was 3.15%, relatively flat from second quarter, but down from last year. And ongoing positive shift in our loan mix, along with further improvement in our funding mix and pricing, should continue to mitigate margin compression from the drag of an extended low interest-rate environment.

In general, asset quality continued to improve. However, we implemented new regulatory guidelines that call for performing consumer loans discharged in bankruptcy to be written down to collateral value. This new guidance cause us to take an incremental loan-loss provision. Our third quarter loan-loss provision was $40 million, including $30 million related to these regulatory driven charge-offs. Consolidated net charge-offs were $79 million, with $40 million related to the regulatory guidance. Excluding the regulatory change-driven charge-offs, net charge-offs were $39 million and declined 63% from third quarter 2011.

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