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First Horizon Beats, Narrows Loss

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First Horizon National Corporation ([url=]FHN[/url]) reported first quarter net loss of 12 cents, better than the Zacks Consensus Estimate of a loss of 16 cents. The company has also narrowed its loss from the prior-year period’s loss of 32 cents.

The better-than-expected results were primarily driven by a decrease in loan loss provisions. Additionally, expenses were lower in the quarter. However, the stressed economic conditions continue to remain an overhang on the company’s results. There was a weak demand for loans while fee income remained pressured as well.

Net loss available to common shareholders decreased to $27.7 million from a loss of $70.6 million in the prior quarter and a loss of $82.8 million in the year-ago quarter. Provisions for loan losses shrank to $105 million from $135 million in the prior quarter and $300 million in the year-earlier quarter.

Inside the Headline Numbers

Total revenue fell 2% sequentially and 28% year-over-year to $428.7 million. Net interest income declined 5% sequentially and 8% year-over-year to $180.4 million. The decrease stemmed from a reduction in outstanding loan balances due to a weak demand for loans and the wind-down of non-strategic portfolios.

However, the company experienced a slight increase in deposits. Though net interest margin remained flat sequentially, it was up 30 basis points (bps) year-over-year.

Non-interest income was up 1% sequentially, though it was down 38% year-over-year to $248.3 million. While the sequential increase reflects a gain from the repurchase of bank debt, the company experienced a decrease in fee income related to deposit transaction in the regional bank and a decline in sales of fixed income products in capital markets.

Non-interest expense decreased 12% sequentially and 16% year-over-year to $342.7 million. While the company has implemented several restructuring initiatives in the past several quarters, the charges for such measures were lower in the reported quarter.

Credit Quality Mixed

Regarding the credit quality, though the absolute figures decreased, the ratios increased slightly in the quarter, with loan balances sliding down. The company continued with its efforts to wind down the higher-risk non-strategic portfolios.

Net charge-offs were relatively flat compared with the prior quarter but down 12% year-over-year. However, net charge-offs as a percentage of average loans were 4.13%, up from 4.0% in the prior quarter and 3.97% in the year-ago quarter. Non-performing assets decreased 1% sequentially and 17% year-over-year to $1.1 billion.

Capital Ratios

Capital levels remained good. Tier 1 capital ratio was 16.54% (estimate), up 15 bps sequentially and up 157 bps year-over-year. Tangible common equity ratio was 7.67%, down 8 bps sequentially but up 60 bps year-over-year. Book value stood at $9.63 per share, representing a decline from $9.81 per share in the prior quarter and $10.79 per share in the year-ago quarter.

Recently, the company has modified its operating segments to better align with its strategic focus on its regional banking franchise, First Tennessee, and its capital markets business, FTN Financial.

First Horizon has executed several strategic initiatives over the last several quarters to reduce its exposure to problem loans, control expenses and boost capital levels. Nevertheless, we expect that the stressed economic environment will continue to bog revenue momentum and compel credit metrics to remain at elevated levels. As such, we have a “Neutral” recommendation on the shares.

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