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A month has gone by since the last earnings report for First Horizon National (FHN). Shares have added about 4.5% 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 catalysts.
First Horizon Q3 Earnings Beat Estimates, Costs Rise
First Horizon reported third-quarter 2020 adjusted earnings per share of 35 cents, surpassing the Zacks Consensus Estimate of 17 cents. However, the bottom line compares unfavorably with 43 cents reported in the year-ago quarter.
Certain non-recurring items included in third-quarter results were the impact of the IBERIABANK merger and the Truist branch acquisition-related expenses and purchase accounting gain impact.
The company’s performance displays top-line strength along with improved loans and deposit balance. Efficiency ratio contracted during the quarter, indicating increased profitability. However, rising expenses and provisions were major drags.
Net income available to common shareholders was $523 million or 95 cents per share, down from the $110 million or 35 cents per share recorded in the prior-year quarter.
Segment wise, quarterly net income for regional banking fell 9% year over year to $121 million. Also, the non-strategic segment reported income of $2 million, down 67% year over year. However, the fixed income segment’s net income of $42 million increased by a wide margin. The corporate segment reported net income of $374 million against net loss of $37 million a year ago.
Higher Expenses Partly Offset Revenue Growth
Total revenues for the third quarter were $1.36 billion, up significantly from $472 million on a year-over-year basis. Also, the top line surpassed the consensus estimate of $789.3 million.
Net interest income for the reported quarter improved 77% year over year to $532 million. Net interest margin shrunk 12 basis points (bps) to 2.84%.
Non-interest income was $823 million, up significantly year over year. On an adjusted basis, non-interest income climbed 69%. A rise in mortgage banking, fixed income, bank-owned life insurance and card fees mainly led to the upside.
Non-interest expenses flared up 91% year over year to $587 million. Also, costs increased 70% on an adjusted basis. Almost all the components witnessed an upsurge during the quarter.
Efficiency ratio was 43.31% compared with the year-ago quarter’s 65.26%. It should be noted that a fall in the efficiency ratio indicates increase in profitability.
Total period-end loans, net of unearned income, totaled $59.7 billion, up 83% from the previous quarter. Also, total period-end deposits were $47 billion, up 81% sequentially.
Credit Quality: A Concern
Allowance for loan losses of $988 million rose considerably from $193 million in the prior-year quarter. In addition, non-performing assets increased to $447 million from $172 million. Also, during the September quarter, the company recorded $230 million in provision for loan losses, up considerably from the year-ago quarter’s $15 million.
Further, as a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.65%, up 103 bps year over year. The quarter witnessed net charge-offs of $67 million compared with the prior-year quarter’s $15 million.
Common Equity Tier 1 ratio was 9.15% compared with the 9.01% witnessed at the end of the year-earlier quarter. Additionally, total capital ratio was 11.97%, up from 11.01%. Leverage ratio was 8.25%, down 80 bps.
Looking forward, management views the NIM compress further, possibly in the high-single-digit to low-double-digit range.
Regarding mortgage banking, the company is of opinion that a seasonal slowdown in volumes may be an offsetting factor in the fourth quarter, yet overall market conditions might remain favorable for the foreseeable future.
Management expects to continue targeting a CET1 ratio in the 9% to 9.25% range in the near term.
Expected Merger-related Cost Saves & Expenses
$42.5 million run-rate by year-end (2020)
$127.5 million in-year savings (2021)
$170 million in-year savings (2022)
Targeted savings expected to come from personnel worth $120 million, $40 million from vendors and reduced occupancy expense worth $10 million.
Merger-related expenses are expected worth $440 million in categories including Professional Fees, Personnel (CIC, Severance, and Retention), Charitable Foundation, Contract Termination and Integration. Notably, in the fourth quarter and 2021, expenses are expected to be $40 million and $100 million, respectively.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
At this time, First Horizon has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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First Horizon National Corporation (FHN) : Free Stock Analysis Report
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