Zacks_Analysts' Blog : First Horizon Lags Estimate - Analyst Blog

First Horizon National Corp.’s (FHN) third-quarter 2011 earnings of 12 cents per share came below the Zacks Consensus Estimate of 16 cents. However, results outpaced the prior quarter’s earnings of 6 cents, significantly exceeding the prior-year quarter by 5 cents per share.

First Horizon’s third-quarter 2011 net income available to common shareholders was $36.1 million compared with $20.0 million in the prior quarter and $15.9 million in the year-ago period. The year-ago figure reflected preferred dividend payments.

First Horizon’s results improved sequentially mainly due to improved top line and better cost control. However, increase in provision for loan losses was on the negative side.

The company reported revenue was $397.2 million, exceeding the Zacks Consensus Estimate of $358 million. The revenue figure also reported a 10% sequential increase, though 7% year-over-year drop was recorded.

Provision for loan losses was $32.0 million, up sequentially from $1.0 million, but down 36% year over year.

Inside the Headline Numbers

The sequential revenue increase of 10% at First Horizon was due to a 2% rise in net interest income. However, non interest income of $185.7 million inched down 1% sequentially. Moreover, year-over-year drop in revenue was due to decline in both net interest and non interest income.

Net interest margin increased 3 bps sequentially to 3.23% and was flat year over year. Period-end loans were up 1% sequentially but down 5% year over year. Moreover, total deposits plummeted 1% sequentially, but inched up 5% year over year.

Non-interest expense decreased 6% both sequentially and year over year to $322.7 million. The improvement was fueled by lower operations services, reduced FDIC premium expense and decline in foreclosed real estate expense.

Credit Quality

Credit quality at First Horizon improved in the quarter. Allowance for loan losses and non-performing assets were down both sequentially and year over year.

Allowance for loan losses were down 14% sequentially and 38% year over year at $449.6 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 2.77%, down 49 basis points (bps) from the prior quarter and 145 bps year over year.

Non-performing assets decreased 22% sequentially and 37% year over year to $582.6 million. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets were 3.02%, down 107 bps sequentially and 198 bps year over year.

Evaluation of Capital

First Horizon’s capital ratios experienced a sequential improvement. Tier 1 capital ratio advanced to 14.47% from 14.39% reported in the prior quarter. Tangible common equity ratio increased 7 bps sequentially to 9.00%. Book value came in at $9.29 per share, up from $9.05 per share reported in the prior quarter.

First Horizon launched a repurchase program of $100 million of its common stock in the open market or in privately negotiated transactions, subject to market conditions, by the end of August 2012.

Our Take

One of the major competitors of First Horizon-JPMorgan Chase & Company (JPM) reported earnings per share of $1.08, outpacing the Zacks Consensus Estimate of 93 cents. Results were also better than $1.01 earned in the prior-year quarter. The better-than-expected numbers were primarily backed by a slowdown in provision for credit losses and slightly higher net revenue, which more than offset an increase in non-interest expense and lower net interest income.

Further, a protracted economic recovery remains an overhang on the company’s results.  The company’s efforts to reduce its exposure to problem loans, control costs, boost capital levels while improving its long-term profitability by focusing on growing its core Tennessee banking franchise, are encouraging. However, regulatory issues remain a concern.

First Horizon currently retains a Zacks #2 Rank, which translates into a short-term 'Buy' rating. However, considering its fundamentals, we have a long-term Neutral recommendation on the shares