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We have recently reiterated our Neutral recommendation on First Horizon National Corp. (FHN - Analyst Report) based on its fundamentals and the current operating environment.

First Horizon 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.

Excluding the negative impact, the company earned 17 cents per share, which slightly 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.

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.

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 growing its core Tennessee banking franchise, which would augur well going forward.

Management remains focused on enhancing productivity and expects to achieve its annualized consolidated expense goal of approximately $1 billion by the end of 2012, a year ahead of its initial target.  This represents a 25–30% reduction from the 2010 level. Going forward, we expect the measures to improve operating efficiencies. Moreover, share buybacks boost investors’ confidence in the stock.

Yet, First Horizon continues to experience a shrinking revenue base, with both interest income and fee income remaining restricted. Given the challenging economic environment and our outlook for a slow and long economic recovery, we expect top-line growth to remain limited in the near future.

Additionally, the company’s net interest margin is likely to decline slightly over the next few quarters as interest rates are expected to remain at historically low levels, which will result in continued pressure on reinvestment yields in the loan and securities portfolio. Moreover, with respect to loan, the company is witnessing considerable competition, including pricing and structure pressures.

Therefore, we believe that the risk-reward profile for First Horizon is balanced and as a result, have retained the company’s Neutral recommendation. In addition, First Horizon currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. One of its closest peers, Cardinal Financial Corp. (CFNL - Snapshot Report) also has a Zacks #3 Rank.
 

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