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First Horizon Reports in the Red

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First Horizon National Corp. (FHN - Free Report) reported third-quarter 2013 loss per share of 45 cents, including the negative impact of 64 cents (after-tax) per share due to the addition of $200 million to the repurchase reserve. Excluding this, the company reported adjusted earnings of 19 cents, in line with the Zacks Consensus Estimate, but well ahead of the year-ago earnings of 10 cents.

Net loss was $107.5 million, versus an income of $25.8 million in the prior-year quarter.

First Horizon’s results reflected lower revenues due to a reduction in both net interest as well as non-interest income. Additionally, higher expenses depicted undisciplined expense management. However, lower provision for loan losses and net charge-offs acted as a tailwind.

Notably, First Horizon signed an agreement in principle (AIP) with Fannie Mae , settling certain legacy representation and warranty repurchase obligations related to loans originated from 2000 to 2008. Certain terms of the agreement are subject to Fannie Mae's governance and regulatory approvals. Further, the company entered into an agreement to vend substantially all remaining legacy mortgage servicing over the coming quarters.

Quarter in Detail

Total revenue came in at $309.3 million, missing the Zacks Consensus Estimate of $312.0 million. Moreover, revenues fell 8% from the year-ago quarter.

On a fully taxable equivalent basis, net interest income declined 8% year over year to $160.7 million. Net interest margin decreased 18 basis points year over year to 2.97%. Non-interest income slipped 8% from the prior-year quarter to $150.5 million.

Non-interest expense surged 65% from the prior-year quarter to $433.6 million. First Horizon’s expenses included $200 million as repurchase and foreclosure provision.

Period-end loans declined 7% year over year to $15.4 billion. However, total deposits remained stable at $16.3 billion as compared with the prior-year quarter.

Credit Quality

First Horizon’s credit quality metrics was a mixed bag in the reported quarter. Allowance for loan losses were down 9% year over year to $255.7 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 1.66%, down 5 basis points year over year.

Further, the company’s provision for loan losses declined 75% year over year to $10 million. Net charge-offs went down 80% on a year-over-year basis to $16.2 million. As a percentage of average loans and on an annualized basis, net charge-offs were 0.41%, substantially down from 1.92% reported in the year-ago quarter.

However, nonperforming assets rose 7% year over year to $482 million. As a percentage of period-end loans plus foreclosed real estate and other assets, nonperforming assets came in at 2.19%, up 4 basis points year over year.

Evaluation of Capital

First Horizon’s capital ratios remained at strong levels. Adjusted tangible common equity ratio to risk weighted assets was 9.69%, compared with 10.03% as of Sep 30, 2012. Moreover, book value came in at $8.64 per share, compared with $9.05 per share in the prior-year quarter.

First Horizon continued with its healthy capital deployment activities. The company repurchased common shares worth $262.7 million during the quarter.

Our Viewpoint

First Horizon’s endeavor to lower its exposure to problem loans is impressive. It also aims to control costs and improve long-term profitability by focusing on strengthening its core Tennessee banking franchise. Moreover, share buybacks and repurchase obligations settlement would augur well going forward.

However, though winding down of the non-strategic part of its loan portfolio bodes well, it will remain a drag on First Horizon’s earnings going forward. In addition to a shrinking revenue base, regulatory issues, a tepid economic recovery and a low interest rate environment will be headwinds for its results.

First Horizon currently carries a Zacks Rank #4 (Sell). Among other Southeast banks, WesBanco Inc. (WSBC - Free Report) is expected to announce third-quarter results on Oct 22, whereas Capital City Bank Group Inc. (CCBG - Free Report) is expected to report on Oct 29.

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