First Horizon Maintains Profitability

| About: First Horizon (FHN)

First Horizon National Corporation (FHN) retained its profitability in the third quarter of 2010. The company, which turned to profit just in the prior quarter after reporting losses in the past eight quarters, reported a net income of $15.9 million or 7 cents per share in the third quarter. This compares favorably with the Zacks Consensus Estimate of a loss of 2 cents.

The company had reported a net income of $2.7 million or 1 cent per share and a net loss of $52.9 million or 23 cents per share in the year-ago quarter.

First Horizon’s results were primarily due to better-than-expected increase in revenues and a decrease in loan loss provisions. Revenues came in at $434.4 million, ahead of the Zacks Consensus Estimate of $407 million. Provision for loan losses shrank to $50.0 million from $70.0 million in the prior quarter and $185.0 million in the prior-year quarter.

However, the sluggish economic recovery continues to remain an overhang on the company's results. There was weak demand for loans while deposits also reported a slight drop in the quarter.

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 charge-offs were down 16% sequentially to $111.4 million. Net charge-offs as a percentage of average loans were 2.63%, down 47 basis points (bps) from the prior quarter. However, non-performing assets increased slightly by 2% sequentially to $919.2 million as a result of some large credits and fewer resolutions and payments.

Inside the Headline Numbers
Revenues were up 1% to $434.4 million from $430.3 million in the prior quarter, driven by a 2% increase in net interest income and a 1% increase in non-interest income. Net interest margin was up 4 bps sequentially to 3.23%. However, the company continued to experience lower outstanding loan balances and a slight decrease in deposits compared to the prior quarter. Also, non-interest expense increased 2% sequentially to $347.6 million.

Capital Ratios
Capital levels remained good. Tier 1 capital ratio was 17.22% (estimate), up 42 bps sequentially. Tangible common equity ratio increased 33 bps sequentially to 7.96%. Book value came in at $9.45 per share, up from $9.39 per share reported in the prior quarter.

Our Take
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. Though the wind-down of the non-strategic part of the loan portfolio augurs well, we believe that it will remain a drag on the company's earnings in the near future. Shrinking revenue base and regulatory issues remain a concern.

Nevertheless, the earnings beat is welcomed by the investors and the First Horizon stock is trading at a premium in today's pre-market session in the New York Stock Exchange.