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First Horizon Issues Warning

Poor market conditions, settlement blamed

August 29, 2006

By MortgageDaily.com staff

A weak mortgage environment and a class action settlement will hurt First Horizon National's quarterly earnings and production.

The Memphis, Tenn.-based lender said Tuesday it expects deterioration in the mortgage sector to reduce pretax third quarter operating earnings by approximately $35 million from the prior quarter's $104.3 million.

In addition, a lawsuit settlement will create an estimated $21 million pretax charge, First Horizon reported.

"Mortgage banking operating earnings for the first two months of this quarter have been unfavorably impacted by lower gain on sale margins, further reductions in mortgage production and increased costs to hedge the servicing risks," the company said.

Although third quarter originations have traditionally been higher than second quarter levels, the company said application trends foreshadow originations and deliveries will drop $1 billion this quarter. Gain on sale margins are expected to decrease to a range between 85 and 90 basis points from the second quarter's level of 122 BPS, and net hedging costs are anticipated to increase by approximately $5 million, according to the announcement.

First Horizon additionally indicated it sees the mortgage slump continuing through the fourth quarter with only modest improvement and break-even earnings for the mortgage banking operation.

The company said it entered into a verbal agreement to settle a 2000 class action lawsuit over allegedly improper loan-origination fees and agreed to pay up to approximately $36 million. The fees included fees permitted by Kansas and federal law but allegedly restricted by Missouri law, when First Horizon Home Loans or its predecessor, McGuire Mortgage Co., made certain second-lien mortgage loans in the Kansas City market, which straddles Kansas and Missouri.

"We continue to believe that neither our predecessor, McGuire Mortgage, nor we acted contrary to applicable law," said Peter F. Makowiecki, president of mortgage banking for First Horizon. "However, we agreed to this settlement to avoid the risks, and to end the ongoing expense, associated with this protracted litigation.

"Although litigation matters never can be predicted with certainty, we believe that the McGuire fact pattern, involving our merger acquisition of a non-bank mortgage lender in a multi-state market, is unlikely to result in other similar claims."

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