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Why Is First Horizon (FHN) Up 7.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for First Horizon National (FHN - Free Report) . Shares have added about 7.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is First Horizon due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

First Horizon Q3 Earnings & Revenues Beat Estimates

First Horizon reported third-quarter 2019 adjusted earnings per share of 43 cents, which surpassed the Zacks Consensus Estimate by a penny. Further, the bottom line was 19% higher than the year-ago figure.

Results reflect First Horizon’s improved loan portfolio and lower expenses. In addition, efficiency ratio contracted during the quarter, indicating increased profitability. However, lower non-interest income and worsening credit quality were major drags.

After considering certain non-recurring items, net income available to common shareholders came in at $109.5 million, down 59% from the prior-year quarter.

Segment wise, quarterly net income for regional banking climbed 4% year over year to $132.7 million. Fixed income segment reported net income of $11.7 million, up significantly. Also, non-strategic segment reported income of $5.9 million, down 46%. Corporate segment incurred net loss of $36.3 million.

Revenues Decline, Loans Rise, Costs Fall

Total revenues came in at $472.4 million, down 28% on a year-over-year basis. However, the top line surpassed the Zacks Consensus Estimate of $464.8 million.

Net interest income dipped 2% year over year to $300.7 million. Net interest margin shrunk 23 basis points (bps) to 3.21%. Also, non-interest income came in at $171.7 million, down 51%.

Non-interest expenses increased 5% year over year to $307.7 million.

Efficiency ratio was 65.14% compared with 66.55% in the year-ago quarter. It should be noted that a fall in the efficiency ratio indicates increase in profitability.

Total period-end loans, net of unearned income, totaled $31.3 billion, up 5% from the previous quarter. However, total period-end deposits were $31.9 billion, down 1%.

Credit Quality Worsens

Allowance for loan losses was up 4% year over year to $193.1 million. However, as a percentage of period-end loans on an annualized basis, allowance for loan losses was 0.62%, down 6 bps year over year.

Nonetheless, the quarter witnessed net charge-offs of $14.6 million compared with $1.5 million in the prior-year quarter. In addition, non-performing assets increased 9% to $194.5 million. Also, during the quarter, the company recorded $15 million in provision for loan losses, up considerably from $2 million a year ago.

Capital Position

Common Equity Tier 1 ratio was 8.99% compared with 9.84% at the end of the year-earlier quarter. Additionally, total capital ratio came in at 10.99%, down from 12.02%.

2019 Outlook

In 2019, return on tangible common equity is expected to be around 17%. Return on assets to be around 1.20%, as increased fee income and cost reductions are expected to drive improvement in profitability.

Further, common equity Tier 1 ratio is likely to be in the 9.5-10% range. Management expects to deploy capital to support loan growth. Capital levels are expected to remain stable with payout ratio within the 35-70% range.

Loan and deposit balances are likely to grow 3-6%. Also, NIM is projected to be around 3.30% on assumptions of two additional rate cuts in 2019 and subsequent further declines in LIBOR.

Efficiency ratio is anticipated to be 61%. The ratio is expected to benefit from restructuring actions and ongoing expense discipline partially offset by reinvestment.

Net charge-offs as a percentage of loans are expected to be about 10 bps.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, First Horizon has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, First Horizon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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