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On Jun 24, 2013, we reiterated our Neutral recommendation on First Horizon National Corporation (FHN - Analyst Report) primarily based on its improved credit quality metrics. However, declining revenues were the downside.

Why Neutral?

First Horizon’s first-quarter earnings of 17 cents per share were in line with the Zacks Consensus Estimate, but beat the prior-quarter earnings by 42%. Lower non-interest expenses, reflecting the company’s prudent expense management, drove the results. However, pressure on revenue growth persisted due to decline in both net interest and non-interest income. Further, higher provision for credit losses was a dampener.

Over the last 30 days, the Zacks Consensus Estimate for 2013 as well as for 2014 remained stable at 78 cents and 90 cents, respectively. As a result, First Horizon currently carries a Zacks Rank #3 (Hold).

Despite the macroeconomic pressure, First Horizon’s credit quality continues to normalize. Credit metrics consistently improved in 2012 as the overall financial condition of businesses and consumers strengthened and the housing market improved in many areas. Going forward, we expect asset quality to improve with continuous reserve releases.  

We are also impressed with the company’s cost-control measures, which have aided in improving bottom-line performance amid the sluggish macroeconomic environment. Moreover, we believe that the company’s solid capital levels will offer flexibility regarding capital deployment as well as other strategic acquisitions in Tennessee or its adjacent markets that will be accretive to growth.

However, First Horizon’s mortgage repurchase issues remain an overhang on its earnings. We are also concerned about the company’s top-line growth and margins, which continue to be impacted by the low rate environment and sluggish economic recovery.

Further, First Horizon’s significant exposure to problem loan categories, such as industrial and commercial mortgage, is another problem. Additionally, regulatory issues will limit the company’s flexibility with respect to business investments.

Other Banks Worth Considering

Better performing banks include Ameris Bancorp (ABCB - Snapshot Report), Farmers Capital Bank Corporation (FFKT - Snapshot Report) and First M&F Corporation , all of which carry a Zacks Rank #1 (Strong Buy).

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