We recently reiterated our Neutral recommendation on First Horizon National Corp. (FHN). The reiteration is based on the company’s financial position following fourth quarter and full year 2010 earnings, repayment of the government bailout money, its strategic efforts, current economic environment, threats and opportunities to the company.
Fourth Quarter and Full Year Flashback
In January, First Horizon released its fourth quarter and full year 2010 earnings results. The company swung to a loss in the quarter following its TARP repayment in late December 2010. It reported a loss of 20 cents per share, way below the Zacks Consensus Estimate of a loss of 2 cents per share. Results, however, compared favorably with the prior-year quarter’s loss of 30 cents per share. For full year 2010, First Horizon reported net loss of 25 cents per share, missing the Zacks Consensus Estimate of a loss of 8 cents per share.
TARP Repayment
First Horizon’s fourth quarter results included a $63 million negative impact associated with its exit from the Troubled Asset Relief Program (TARP). The company repurchased its TARP preferred shares after raising capital in the equity and debt markets. Besides First Horizontal, another regional bank––Huntington Bancshares Inc. (HBAN) also repaid its TARP dues in December.
Apart from the TARP repayment, First Horizon’s results also tumbled due to lower-than-expected revenues in the quarter, resulting from a fall in non-interest income. However, decrease in loan loss provisions, coupled with a drop in expenses were encouraging.
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.
First Horizon continues to experience a shrinking revenue base, with both interest and fee income remaining curtailed. Given the challenging economic environment and our outlook for a slow and long economic recovery, we expect the top line to remain restricted in the near future. Additionally, with interest rate projected to remain low for an extended period, we believe expansion in interest margin would be limited. Besides shrinking revenue base, mortgage repurchase risk and regulatory issues remain our concern.
Nevertheless, credit quality measures continue to improve at First Horizon. Going forward, we expect the company’s strategic initiatives to improve the asset quality with continued reserve releases. However, the pace of improvement is likely to be slow as the economy is anticipated to revive at a sluggish rate.
While the repayment of the bailout money is a positive for the First Horizon stock, as it removes the government overhang, we believe the dilutive impact from the common stock offering cannot be ignored either.However, in an effort to return value to shareholders, the company has recently resumed cash dividends. Hence, considering both pros and cons, we reiterated our Neutral stance.
First Horizon shares currently have a Zacks #4 Rank, which translates into a short-term Sell recommendation.
FIRST HRZN NATL (FHN): Free Stock Analysis Report
HUNTINGTON BANC (HBAN): Free Stock Analysis Report
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