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First Horizon Slumps on Outlook

The bank says 'persisting market weakness' moved it to up its forecast for bad loans.

First Horizon

(FHN) - Get Free Report

shares plunged as much as 10% early Wednesday after the Memphis-based bank warned that loan charge-offs could be nearly $600 million this year.

As a result of "persisting market weakness" and the bank's actions to address problem loans, the mortgage-heavy company's net charge-offs will likely exceed its previous guidance of $385 million to $485 million by as $100 million, the bank said after the markets closed on Tuesday.

First Horizon said that the higher than expected losses were fueled by identifying and taking writedowns on potential loan losses earlier as well as "continuing deterioration in collateral values, particularly of land and lots" in its homebuilder portfolio. It also says that the troubled economy is continuing to stress certain commercial loans including commercial and industrial loans and "income" commercial real estate loans.

On a bright note, First Horizon reiterated that delinquencies in its home equity portfolio "continue to run below first-half 2008 levels" and have "remained stable" in recent months. The bank also continues to wind down its national specialty lending portfolio. The $8.6 billion portfolio fell by $300 million since the end of the second quarter.

First Horizon also completed the


of its mortgage origination and servicing platform for outside its home state to MetLife Bank, a subsidiary of


(MET) - Get Free Report

. First Horizon had an additional 250 mortgage production offices outside Tennessee. MetLife purchased roughly $380 million of assets, which included servicing rights to $19 billion in first-lien mortgages as well as $300 million of custodial deposits related to the assets sold, First Horizon said.

First Tennessee Bank, its principal banking subsidiary, will continue to originate mortgages for customers inside its home state.

The bank reiterated that it expects to take chares between $35 million and $50 million over the second half of the year related to the sale.

Similar to other banks that once relied heavily on mortgage lending as a profitable revenue stream, the company has been pulling back to focus on in-market prime retail mortgage originations as the credit and housing crisis continues.

Last year, it exited the subprime underwriting business. The company has a large Alt-A mortgage business and commercial and construction loan portfolio.

The company reiterated a priority to maintain strong capital levels. At the end of the second quarter, its Tier-1 capital level stood at 10.5%.

"While we continue to proactively identify and charge-down problem loans, we expect the combined benefits of solid pre-provision earnings and roughly $4 billion of balance sheet shrinkage should improve our capital ratios even further in the quarters ahead," said CEO Bryan Jordan, who took the company's reins on Sept. 1 from retiring CEO Jerry Baker.

Shares most recently were down 2.5% to $11.40.