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First Horizon Misses by a Penny

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First Horizon National Corp.’s (NYSE:FHN - News) fourth-quarter 2011 earnings of 13 cents per share came a penny below the Zacks Consensus Estimate. However, results compared favorably with operating earnings of 12 cents per share in the prior quarter and a loss of 19 cents per share in the year-ago quarter.

Results reflected subdued top-line figures. However, a decrease in provision for loan losses as well as expenses was on the upside.

First Horizon’s reported full-year 2011 operating earnings per share of 47 cents, compared with a loss of 20 cents in 2010. Full year 2011 earnings per share missed the Zacks Consensus Estimate by 4 cents.

First Horizon’s fourth-quarter 2011 net income available to common shareholders was $34.9 million compared with $36.1 million in the prior quarter and a loss of $48.7 million in the year-ago quarter. The year-ago figure reflected preferred dividend payments.

For full year 2011, First Horizon reported net income available to common shareholders of $131.2 million, compared with a loss of $57.8 million in 2010.

The company reported revenue was $360.1 million, slightly missing the Zacks Consensus Estimate of $361 million. The revenue figure also reported a 9% sequential decrease and a 7% year-over-year drop.

For full year 2011, First Horizon’s revenue came in at $1.49 billion, down 11% year-over-year but slightly above the Zacks Consensus Estimate of $1.46 billion.

Provision for loan losses was $10.0 million, down a whooping 69% sequentially and 78% year over year.

Quarter in Detail

The sequential revenue decrease of 9% at First Horizon was due to a 3% fall in non-interest income and decrease in net securities gains, partly offset by a 1% rise in net interest income. Moreover, the 7% year-over-year drop in revenue was due to a 4% decrease in non-interest income and a 2% fall in net interest income as well as lower net securities gains.

Net interest margin of 3.23% was flat sequentially and up 5 basis points year over year. Period-end loans were up 1% sequentially but down 2% year over year. Moreover, total deposits advanced 3% sequentially and 7% year over year.

Non-interest expense decreased 3% sequentially and 5% year over year to $312.0 million. The company reported a decline across most of the expense categories.

Credit Quality

Credit quality at First Horizon improved in the quarter. Allowance for loan losses and non-performing assets were down both sequentially and year over year.

Allowance for loan losses were down 15% sequentially and 42% year over year at $384.4 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 2.34%, down 43 basis points (bps) from the prior quarter and 162 bps year over year.

Non-performing assets decreased 11% sequentially and 38% year over year to $521.2 million. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets were 2.57%, down 45 bps sequentially and 191 bps year over year.

Evaluation of Capital

First Horizon’s capital ratios were mixed in the quarter. Tier 1 capital ratio decreased to 14.16% from 14.44% reported in the prior quarter. However, tangible common equity ratio increased 5 bps sequentially to 9.05%. Book value came in at $9.28 per share, slightly down from $9.29 per share reported in the prior quarter.

Capital Deployment Update

Concurrent with its third quarter earnings release, First Horizon launched a repurchase program of $100 million of its common stock in the open market or in privately negotiated transactions, subject to market conditions, by the end of August 2012. In the fourth quarter, the company used $44 million to buy back stock under its repurchase program.  

Simultaneous with its fourth quarter earnings release, First Horizon's Board of Directors has approved payment of a quarterly cash dividend on its common stock of 1 cent per share. The dividend is payable on April 1, 2012, to the common shareholders of record on March 16, 2012. 

Our Take

Going forward, we believe that First Horizon’s efforts to reduce its exposure to problem loans, control costs, boost capital levels and improve long-term profitability by focusing on growing its core Tennessee banking franchise are encouraging. Capital deployment initiatives are impressive.

Yet, though the wind-down of the non-strategic part of the loan portfolio augurs well, it will remain a drag on the company's earnings going forward. A shrinking revenue base and regulatory issues remain our concern. Moreover, a sluggish economic recovery coupled with a low interest rate environment and mortgage exposure serves as headwind for the company’s results.

Among First Horizon’s peers,Regions Financial Corporation (NYSE:RF - News) will be releasing its fourth-quarter 2011 earnings on January 24, while Popular Inc. (NasdaqGS:BPOP - News) will be releasing on January 25.

First Horizon retains its Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we maintain long-term Neutral recommendation on the stock.

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