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Shares of First Horizon National Corporation (FHN - Analyst Report) have recorded a year-to-date return of 12.9%. Improvement in credit quality, disciplined expense management and healthy capital deployment primarily drove the growth. However, we are not so optimistic about these positives translating into further price appreciation down the road as there will be significant pressure on its top line.

After analyzing its fundamentals following third-quarter 2013 earnings release, our suggestion is to stay invested in the stock but not add further shares of the company to your portfolio.   

Why This Stance?

Though First Horizon’s third-quarter 2013 operating earnings per share of 19 cents were in line with the Zacks Consensus Estimate, it was higher than 10 cents earned in the prior-year quarter. Further, due to addition of $200 million to the repurchase reserve, the company reported loss per share of 45 cents, including the negative impact of 64 cents (after-tax) per share.

Despite the overall sluggish economic environment, First Horizon’s credit quality continues to improve. We anticipate asset quality to be relatively stable or enhance modestly in the near term, given the company’s continuous reduction of its problem assets.

Further, First Horizon’s cost containment measures have helped it to experience bottom-line improvement over the past several quarters. Additionally, the sale of its mortgage servicing business can generate savings of about $20.0 million in the long run. Going forward, we expect such achievements to boost operating efficiencies.

However, First Horizon continues to experience a shrinking revenue base, with both interest income and fee income being limited. Although interest rates have started rising, a substantial improvement in NIM remains elusive in the near term.

Additionally, we remain concerned about issues related to the company’s mortgage repurchase. Although the company has an adequate mortgage repurchase reserve and seeks to resolve mortgage repurchase-related problems, it will take some time for earnings to grow significantly.

Estimate revisions showed a mixed trend. Over the last 30 days, the Zacks Consensus Estimate for 2013 remained stable at 6 cents but for 2014, it declined 1.4% to 72 cents over the same time frame. Hence, First Horizon now has a Zacks Rank #4 (Sell).

Other Stocks to Consider

Some better-ranked banks include American National Bankshares Inc. (AMNB - Snapshot Report), First NBC Bank Holding Co. (NBCB - Snapshot Report) and Preferred Bank (PFBC - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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