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First Horizon (FHN) Q1 Earnings Beat Estimates, Stock Falls

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First Horizon National Corporation (FHN - Free Report) reported first-quarter 2018 adjusted earnings per share of 34 cents, surpassing the Zacks Consensus Estimate by 13.3%. The adjusted figure excludes pre-tax acquisition-related expenses and gain on sale of a building.

Shares of First Horizon declined 1.1% following its earnings release, owing to investors’ dissatisfaction over substantial rise in expenses and weakening of capital position. However, improvement in net interest income and non-interest income supported the results. Further, better efficiency ratio during the quarter acted as a tailwind.

Net income available to common shareholders for the quarter was approximately $90.6 million, up 68% from the prior-year period.

Segment wise, quarterly net income at Regional Banking surged 98% year over year to $127.7 million. Also, net income for Fixed Income and Non-Strategic segments jumped 23% and 76%, respectively, from the prior-year quarter. However, the Corporate segment reported net loss of $42.4 million compared with net loss of $12.2 million in the prior-year quarter.

Increase in Revenues Partially Offset by Elevated Expenses

Total revenues for the quarter came in at $437.2 million, up 43% on a year-over-year basis. However, the figure lagged the consensus estimate of $445.1 million.

Net interest income for the quarter increased 59% year over year to $301.2 million. Net interest margin of 3.43% was up 51 basis points (bps) from 2.92% in the prior-year quarter. Also, non-interest income increased 16% to $135.9 million, primarily due to a rise in deposit transaction and investment management fees along with higher insurance income, partially offset by lower fixed income.

Non-interest expenses increased 41% year over year to $313.3 million due to a rise in almost all the components except legal fees and advertising related costs.

Efficiency ratio came in at 71.67% compared with 72.47% in the year-ago quarter. A fall in efficiency ratio indicates rise in profitability.

Total period-end loans, net of unearned income, came in at $27.2 billion, down 1% from the previous quarter. However, total period-end deposits amounted to $30.8 billion, up 1% sequentially.

Credit Quality: A Mixed Bag

During the quarter, the company recorded a credit of $1 million in provision for loan losses, similar to the prior-year quarter.  Further, allowance for loan losses was down 7% year over year to $187.2 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses was 0.69%, down 37 bps.

However, the quarter witnessed net charge-offs of $1.4 million as against net recoveries of $0.9 million in prior-year quarter. Also, non-performing assets increased 7% year over year to $172.7 million.

Capital Position Weakens

Tier 1 common equity ratio was 8.98%, down from 10.20% at the end of the prior-year quarter. Also, total capital ratio was 11.25%, down from 12.39% in year-ago quarter.

Our Viewpoint

Continued growth in loans, along with continued expansion of net interest margin, will likely supplement First Horizon’s top line. Moreover, lower tax rates are expected to further support its bottom-line growth. However, elevated expenses continue to hurt the company’s financials.

First Horizon National Corporation Price, Consensus and EPS Surprise

First Horizon has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other Southeast banks, Hancock Holding Co. is scheduled to release first-quarter earnings on Apr 17 while Regions Financial Corp. (RF - Free Report) and Trustmark Corp. (TRMK - Free Report) will release earnings on Apr 20 and Apr 24, respectively.

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