First Horizon National Earnings Call Nuggets: Private Securitization, Statutes of Limitations

On Friday, First Horizon National Corp (NYSE:FHN) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Private Securitization

Kevin Fitzsimmons – Sandler O’Neill: We heard your comment about the private securitization being still significantly lower risk then what you guys experienced on GSE and now you have three more additional lawsuits. Can you just dig into that a little more on why you still feel good? I think before you’ve talked about timing being your friend on this and statute limitations, if you could just kind of give us your sense of comfort and why the incremental lawsuits don’t necessarily increase the risk for you? Then on the topic of put-backs I noticed on Page 26 of the slide deck on whole loan sales there is a new line in there and certain parties have initiated loan filed reviews if you could just comment on what that means whether that’s an incremental source of put-back request to expect?

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William C. Losch III – EVP and CFO: Hi, Kevin, it’s B.J. Good morning. I’ll just start with the second, I don’t think that that comment is new and what we saw in the third quarter was the FDIC with some suits putting back some loans from some field institutions you’ve seen that across the industry so we got a few of those and we also got a few indemnification requests, which aren’t technically lawsuits but they are requests for us to indemnify loans that we had sold to others who then securitized loans, so they are a little different. But stepping back from that in general, there is obviously a lot of activity around this. We knew that, we actively monitored that. We have lawsuits in the past. But we continue to believe that based on the fact that we haven’t done anything since 2007 on these, that our performance on these is relatively good, relative to others in terms of performance. Time is our friend, particularly from a litigation perspective in terms of suits being brought, etcetera. We still continue to believe that there are a lot of mitigating factors here that give us confidence that this experience, if any, it’s going to be moralist what we saw in the GSEs.

Kevin Fitzsimmons – Sandler O’Neill: BJ, what about the FHFA lawsuit, any new developments there, I know that was probably set not to come to trial for quite some time?

William C. Losch III – EVP and CFO: Yeah, that’s right. We currently understand that that’s not supposed to go to trial until sometime in 2015. So, there’s still a lot of back and forth going on in terms of the normal legal process, there, but it’s still in the early stages.

Statutes of Limitations

Steven Alexopoulos – JP Morgan: To follow-up on Kevin’s questions, if we look at the revised disclosures and the appendix on the private label, you are now past the five-year statute limitations on almost all of these, right, the last big one was in August of ’07. Why is this risk not now behind you in terms of having to provide on the private label side going forward?

William C. Losch III – EVP and CFO: I think, as we’ve talked about before, the state statutes of limitations are not all the same. Many of them are three years; many of the others are five years. There are a handful that are longer than that around six years, but by the end of this year 100% of our securitizations will be greater than five years old, which means that particularly the ’06s will be greater than six years old. So that’s what we talk about when time is our friend. There’s still as you can see in the industry, plenty of activity, people trying to take action on these and we’ll just have to deal with that but again, the longer this goes the better it is for us.

Bryan Jordan – Chairman, President and CEO: I’ll add to that. I think in the broad scheme of things the statutes of limitations and repose are our friend as BJ said and the passage of time is helpful and there are – we think that as these things have continued to perform as they’ve continued to pay down, that risk does diminish every quarter that goes by. So we do feel good about that. There are, as pointed out in the comments BJ made about indemnification requests for loans. There are two ways to have exposure, one is securities litigation and that’s where the statutes of limitations and repose is most impactful, but you also have whole loan requests. The indemnification request that BJ referenced are not specific as I would translate it to basically placeholder, saying that we’ve been requested to buy back some loans in the (number of) years and if you breach governments we’re going to ask you to buy them back. So at this point we’re basically place holders and it’s hard to read through what that ultimately means as we’ve said several times over the last several years when you look at this in total we think that this is an exposure that is manageable significantly less than our view than anything we’ve experienced on the Fannie Mae and Freddie Mac repurchases and we think it diminishes as times passes. So, we think it’s important that we keep you up to date on what’s going on but our view of the risk is still where it’s been which is this is manageable in the declining times.

Kevin Fitzsimmons – Sandler O’Neill: Just one other question on the new OCC guidance it seems to be impacting the industry to a different degree some banks have to provide for just others which is impacting your structure loans and charge-offs. Could you explain to us why you needed to provide another $30 million as it relates to the new guidance?

William C. Losch III – EVP and CFO: Yes, Steve it’s BJ. A couple of different things that I’ll mention here and I mentioned it in my talking points at the beginning. One is when we got this guidance late in the quarter and when we looked at what this would impact keep in mind that most of these are for performing loans and if you think about how you reserve for performing loans on the consumer side, lot of times you’re looking at a low rate methodology and if some things current you’re going to have very little reserve against it, okay. So, that’s why we had much more in charge-off than we had in release of reserves net specifically related to this. There is something called unallocated reserves, some people call it economic reserves that are not specifically tied to any loans or loan portfolio that people have. We specifically chose not to use any of these unallocated or economic reserves to offset this impact, we didn’t find that appropriate. I believe if you look across at others in the industry, they may have done that. So, we made that conscious decision, it hurts us right now. We think it’s an accounting issue and an unfortunate accounting hurt and as we’ve said, we think this accretes back to us over the long-term. You can see in talking points as well, for those customers that we had that have been bankrupt over two years, 60% of those have sent us a payment every month consecutively for the last 24 months. That tells you that they are paying. They do believe that they owe this and that we expect again to recover a lot of this over the next several quarters.

Bryan Jordan – Chairman, President and CEO: Steve this is Bryan. I’ll give sort of Lehman recovery and accounted year there with some respects. We go through and we look at the make-up of our portfolio and as BJ and I sort of pointed out indirectly we had about 25% reserves on these assets which is sort of difference between the charge-off level and the incremental provisions. So, we had about 25% reserve and as BJ described that the unallocated or really the qualitative factors that go into the reserve, there’s a lot of judgment and this gets factored into it. We just felt like it was appropriate not to adjust our qualitative factors at this time, to leave those reserves and to take the charge through P&L. Other people can reach different judgments, but we just stay on the side off leaving our qualitative reserves where they are given where we are in the cycle.

A Closer Look: First Horizon Earnings Cheat Sheet>>