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First Horizon National Corp. (FHN - Analyst Report) has returned to profit in the third quarter of 2012 by reporting earnings per share of 10 cents, after reporting a loss in the prior quarter.

However, the third quarter results included the negative impact of 7 cents per share from regulatory guidelines issued of late on consumer loans and missed the Zacks Consensus Estimate of 18 cents per share. While the pressure on revenue growth continued, expenses were down both sequentially and year over year, which was encouraging.

First Horizon reported net income available to common shareholders of $25.8 million or 10 cents per share in the reported quarter, compared with a loss of $124.8 million or 50 cents per share in the prior quarter and a net income of $36.1 million or 12 cents per share from continuing operations in the year-ago quarter. Notably, increase in reserves for government-sponsored entities mortgage repurchases resulted in First Horizon reporting a loss in the prior quarter.

Revenue came in at $337.0 million, slightly below the Zacks Consensus Estimate of $339 million. The revenue figure advanced 2% sequentially but fell 15% year over year.

However, First Horizon’s provision for loan losses reported a significant increase to $40 million in the quarter under review from $15 million reported in the prior quarter and moved up 25% from $32 million reported in the year-ago quarter.

Quarter in Detail

First Horizon’s net interest income was relatively flat sequentially and down 2% year over year to $173.5 million. Net interest margin moved down 1 basis point (bp) sequentially and 8 bps year over year to 3.15%.

Non-interest income increased 6% sequentially but slipped 12% year over year to $163.5 million. However, encouragingly, non-interest expense plummeted 50% sequentially and 18% year over year to $263.2 million. As anticipated, the mortgage repurchase provision expense for the quarter was nil and the company benefited from its efficiency measures.

Period-end loans were up 2% both sequentially and year over year at First Horizon. Total deposits increased 1% sequentially and 3% year over year. Moreover, total consolidated average loans advanced 3% year over year, and average loans in the C&I portfolio reported a growth of 15% from the year-ago period.
 
Credit Quality

First Horizon’s credit quality metrics bore the impact of the recently issued regulatory guidelines on performing consumer loans. However, on a year-over-year basis, trends continued to improve.

Of the loan loss provision of $40 million in the third quarter, $30 million were related to the implementation of regulatory guidance.

Allowance for loan losses were down 12% sequentially and 37% year over year to $281.7 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 1.71%, down 27 bps from the prior quarter and 106 bps year over year.

Net charge-offs were up 98% sequentially but fell 25% year over year to $79.3 million. Net charge-offs in the reported quarter included $40 million related to the recently issued regulatory guidance. As a percentage of average loans and on an annualized basis, net charge-offs were 1.92%, compared with 1.01% in the prior quarter and 2.65% in the year-ago quarter.

Non-performing assets fell 4% sequentially and 23% year over year to $450.4 million. Of that, $31 million was for the recent regulatory guidance. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets were 2.15%, down 17 bps sequentially and 87 bps year over year.

Evaluation of Capital

First Horizon’s capital ratios slightly improved from the prior quarter but were down year over year. However, capital ratios were above well-capitalized levels.

Tier 1 capital ratio inched up to 13.14% from 13.12% in the prior quarter but fell from 14.44% in the year-ago quarter. Tangible common equity ratio remained flat sequentially and down 87 bps year over year to 8.13%. Also, book value came in at $9.05 per share, up from $8.92 per share in the prior quarter but down from $9.29 in the year-ago quarter.

Capital Deployment Update

On October 17, the Board of Directors of First Horizon approved a quarterly cash dividend of 1 cent per share. The dividend is payable on January 1, 2013, to the common shareholders of record on December 14, 2012.

During the reported quarter, First Horizon bought back $15 million in shares. Following this, the company had $60 million available under its $200 million stock repurchase program.

Our Viewpoint

While winding down of the non-strategic part of the loan portfolio bodes well, it will remain a drag on First Horizon’s earnings going forward. Shrinking revenue base and regulatory issues, tepid economic recovery along with a low interest rate environment serve as headwinds for the company’s results.

Yet, First Horizon’s endeavor to lower its exposure to problem loans is impressive. It is also aiming at controlling costs and improving long-term profitability by focusing on strengthening its core Tennessee banking franchise, which would augur well going forward. Moreover, share buybacks give a boost to investors’ confidence in the stock.

Among First Horizon’s peers, both Regions Financial Corporation (RF - Analyst Report) and Synovus Financial Corp. (SNV - Analyst Report) will release their third-quarter 2012 earnings on October 23.

First Horizon retains its Zacks #3 Rank, which translates into a short-term Hold rating.

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