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First Horizon National Corp.’s (FHN - Free Report) first quarter 2011 earnings of 15 cents per share were well ahead of the Zacks Consensus Estimate of 4 cents per share.

Results also came in favorably compared with a loss of 20 cents per share in the prior quarter and a loss of 12 cents per share in the year-ago quarter. First quarter 2011 net income available to common shareholders was $40 million, compared to a loss of $49 million in the prior quarter.

First Horizon’s results significantly benefited from a drop in loan loss provisions and lower expenses. Net loan charge-offs and non-performing assets continued to trend downward. However, this was partially offset by lower-than expected revenue, driven by a drop in net interest income.

Revenue came in at $370.3 million, below the Zacks Consensus Estimate of $385 million. The revenue figure also reported a 13% year-over-year drop. The sluggish economic recovery remains an overhang on the company's results and loan demand continues to be weak.

On the other hand, provision for loan losses shrank to $1.0 million from $45.0 million in the prior quarter and $105.0 million in the prior-year quarter.

Inside the Headline Numbers

Revenue decreased 5% sequentially to $370.3 million, due to a 5% decline in net interest income, which was partially offset by a 3% increase in non-interest income. Net interest margin increased 4 bps both sequentially and year over year to 3.22%. The company continued to experience lower outstanding loan balances.

Nevertheless, non-interest expense decreased 4% sequentially to $315.1 million. The improvement was fuelled by lower compensation, reduced mortgage repurchase expense and productivity and efficiency gains from technology investments and improvements to business processes and procurement.

Credit Quality

Credit quality improved in the quarter and the company continued with its efforts to wind down the higher-risk non-strategic portfolios. Net loan charge-offs and non-performing assets were down in the first quarter to the lowest levels in three years.

Net charge-offs were down 23% sequentially to $76.7 million. Net charge-offs as a percentage of average loans were 1.90%, down 48 basis points (bps) from the prior quarter. Non-performing assets decreased 2% sequentially to $819.0 million.

Evaluation of Capital

During the first quarter, First Horizon repurchased the warrant issued to the U.S. Department of the Treasury in 2008 under the Capital Purchase Program. 

Tier 1 capital ratio was 14.19%, up from 13.99% in the prior quarter. Tangible common equity ratio decreased 2 bps sequentially to 8.91%. Book value came in at $8.90 per share, down from $9.05 per share reported in the prior quarter.


Earlier this week, the company announced a 1 cent per share quarterly cash dividend. The dividend is payable on July 1, 2011 to the common shareholders of record on June 10, 2011.

Our Take

Lower credit costs have been the trend in first quarter results. Wall Street biggies such as U.S. Bancorp (USB - Free Report) and Citigroup Inc. (C - Free Report) have benefited from credit quality improvement. These banks have reduced their loan provisions and results could match or exceed market expectations. However, revenue growth remains elusive at many of the Wall Street banks and we do not expect a significant turnaround in the near term.

First Horizon has undertaken several measures to reduce its exposure to problem loans, control costs and boost capital levels. It has executed several strategic repositioning efforts to improve long-term profitability by focusing on growing its core Tennessee banking franchise.

Recently, First Horizon is shedding its insurance unit. The company has announced its agreement to sell First Horizon Insurance Inc. to insurer Brown & Brown Inc. (BRO - Free Report) , through its principal subsidiary First Tennessee Bank. The move came as part of its effort to improve its focus on banking and capital markets.

Though the wind-down of the non-strategic part of the loan portfolio bodes well, we believe that it will remain a drag on the company's earnings in the near future. A shrinking revenue base, mortgage repurchase risk and regulatory issues remain our concerns.

First Horizon currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.

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