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First Horizon National Corp. (FHN - Analyst Report) has reported-fourth earnings per share of 17 cents, in line with the Zacks Consensus Estimate and well ahead of the prior quarter earnings of 10 cents a share. The results were driven by considerably improved credit trends. However, the pressure on revenue growth continued. Rising expenses was also a headwind.

First Horizon reported net income available to common shareholders of $40.7 million, which climbed 58% from $25.8 reported in the prior quarter.
 
First Horizon reported full-year 2012 operating loss per share of 11 cents, in line with the Zacks Consensus Estimate. The company had earned 47 cents in 2011. The company incurred a charge of $250 million in the second quarter of 2012 to address the issues related to the GSE mortgage repurchase, which led to a loss in full year 2012.
 
Total revenues came in at $317.0 million, below the Zacks Consensus Estimate of $338 million. Moreover, the total revenue fell 6% sequentially. For full year 2012 First Horizon’s revenue came in at $1.36 billion, down 9% year over year and below the Zacks Consensus Estimate of $1.39 billion.
 
However, First Horizon’s provision for loan losses reported a 63% decline to $15 million in the quarter under review from $40 million reported in the prior quarter. 
 
Quarter in Detail
 
First Horizon’s net interest income went down 2% to $170.6 million from the last quarter. Net interest margin dipped 6 basis points (bps) sequentially to 3.09%. Non-interest income slipped 8% sequentially to $151.1 million. 
 
Moreover, non-interest expense rose 3% from the prior quarter to $271.4 million. For the reported quarter, the impact from First Horizon’s expense control measures, like streamlining of operations, consolidating of branches based on customer preference and reduction of headcount, were more than offset by $17 million expense incurred by the company due to a voluntary separation program to some employees who did not have direct contact with the customers.
 
Period-end loans were up 1% sequentially to $16.7 billion. Total deposits increased 2% from the last quarter to $16.6 billion. 
 
Credit Quality
 
First Horizon’s credit quality metrics improved in the quarter under review. Allowance for loan losses were down 2% sequentially and 28% year over year to $277.0 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 1.66%, down 5 bps from the prior quarter and 68 bps from the prior-year quarter. 
 
Net charge-offs went down substantially on both sequentially and year-over-year basis to $19.8 million. As a percentage of average loans and on an annualized basis, net charge-offs were 0.48%, down from 1.92% reported in the prior quarter and 1.84% in the year-ago quarter.
 
Non-performing assets fell 7% sequentially and 20% year over year to $419.4 million. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets came in at 1.84%, down 31 bps sequentially and 73 bps year over year.
 
Evaluation of Capital
 
First Horizon’s capital ratios remained a mixed bag in the reported quarter.
 
Adjusted tangible common equity ratio to risk weighted assets was 9.90%, down from 10.03% as of Sep 30, 2012 and 10.80% as of Dec 31, 2011. Also, book value came in at $9.09 per share, up from $9.05 per share reported in the prior quarter but down from $9.28 in the year-ago quarter.
 
Capital Deployment Update
 
For the full year 2012, First Horizon repurchased $131 million of common stock compared with $44 million in 2011.  
 
Our Viewpoint
 
Although 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. In addition to shrinking revenue base, regulatory issues, tepid economic recovery along with a low interest rate environment serve as headwinds for its 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 boost investors’ confidence in the stock.
 
First Horizon retains a Zacks Rank #3 (Hold).
 
Among its peers, Synovus Financial Corp. (SNV - Analyst Report) and Regions Financial Corp. (RF - Analyst Report) will release their fourth-quarter 2012 earnings on Jan 22, 2013.

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