It has been about a month since the last earnings report for First Horizon National (FHN). Shares have added about 8% 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 its most recent earnings report in order to get a better handle on the important drivers.
First Horizon Q1 Earnings Beat Estimates On Solid Revenues
First Horizon reported first-quarter 2021 adjusted earnings per share of 51 cents, beating the Zacks Consensus Estimate of 37 cents. Further, the bottom line showed significant improvement from the prior-year quarter’s 5 cents.
Results benefited from growth in revenues and provision benefits, partly offset by higher expenses. Moreover, loan balance climbed during the quarter. However, pressure on margin due to low interest rates is a concern.
Net income available to common shareholders (GAAP basis) was $225 million or 40 cents per share, up significantly from the $12 million or 4 cents per share recorded in the prior-year quarter.
Segment wise, net income for regional banking increased to $220 million. Also, the specialty banking segment reported net income of $149 million, up significantly from the year-ago quarter. Yet, the corporate segment incurred net loss of $133 million.
Revenues Improve, Expenses Rise
Total revenues came in at $806 million, up 69% year over year. Further, the top line surpassed the consensus estimate of $770.6 million.
Net interest income jumped 68% year on year to $508 million. However, net interest margin shrunk 53 basis points (bps) to 2.63%.
Non-interest income was $298 million, surging 71% from the year-ago level. Increase in all the components resulted in this rise. On an adjusted basis, non-interest income soared 70%.
Non-interest expenses climbed 80% year over year to $544 million. All expense components witnessed a rise during the quarter. Costs flared up 57% on an adjusted basis.
Efficiency ratio was 67.53% up from the year-ago period’s 63.26%. It should be noted that a rise in the efficiency ratio indicates decrease in profitability. However, adjusted efficiency ratio was 57.49% compared with the prior-year quarter’s 61.76%.
Total period-end loans and leases, net of unearned income, totaled $58.6 billion, up 1% from the prior quarter’s end. Total period-end deposits of $47.7 billion remained flat.
Credit Quality Deteriorates
Allowance for loan losses of $914 million increased significantly from the year-ago period’s $444 million. In addition, non-performing loans and leases of $394 million grew substantially from the $190 million recorded in the prior-year period.
Further, as a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.56%, up 23 bps from the previous-year quarter.
The first quarter witnessed net charge-offs of $8 million, up 14% from the prior-year quarter. However, provision for loan losses was a benefit of $45 million against the provision of $154 million seen in the prior-year quarter.
Capital Ratios Mixed
As of Mar 31, 2021, common Equity Tier 1 ratio was 9.96%, up from the 8.54% reported at the end of the year earlier quarter. Additionally, total capital ratio was 12.83%, up from the previous-year quarter’s 10.78%. Tier 1 leverage ratio was 8.20%, down 4 basis point year on year.
The company expects NII to remain flat or decline inlow single digit percentage. It also expects continued growth in excess cash, higher Paycheck Protection Program and LMC balances. Average loans might decline modestly.
Non-interest income is expected to witness low single digit growth.
On the expense front, management expects it be relatively stable, whereas costs excluding incentives and commissions are expected to risein low-single digits.
Net charge offs are anticipated to be in the range of 5- 15 bps.
Management expects to continue targeting a CET1 ratio of about 10% in the second quarter of 2021.
The company estimates a low- to mid-single digit decline in NII, given the outlook for low interest rates, accelerating PPP forgiveness and decreased merger accretion benefits.
Management anticipates a continued relatively strong environment for fixed income businesses and a lower mortgage banking result given higher rates and tight housing market; fee income is likely to fall by mid to high single digit.
On the expense front, non-interest expense might be down in the low- to- mid-single digit range with results excluding incentives and commissions down in low-single digits. The company’s focus on efficiency and cost containment will result in an expense decline over the next year.
The company expects potential for continued reserve releases if macro-economic scenario persistently improves. Net charge-offs in the range of 10-20 bps is expected.
Finally, Tier CET1 ratio is projected at 9.5-10%, reflecting the expectation for risk weighted assets to be modestly lower and the potential to opportunistically repurchase shares over the course of the year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 19.92% due to these changes.
Currently, First Horizon has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise First Horizon has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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