First Horizon Swings to Profit - Analyst Blog
April 21 2011 - 1:50PM
Zacks
First Horizon National Corp.’s (FHN) first
quarter 2011 earnings of 15 cents per share were well ahead of the
Zacks Consensus Estimate of 4 cents per share.
Results also came in favorably compared with a loss of 20 cents
per share in the prior quarter and a loss of 12 cents per share in
the year-ago quarter. First quarter 2011 net income available to
common shareholders was $40 million, compared to a loss of $49
million in the prior quarter.
First Horizon’s results significantly benefited from a drop in
loan loss provisions and lower expenses. Net loan charge-offs and
non-performing assets continued to trend downward. However, this
was partially offset by lower-than expected revenue, driven by a
drop in net interest income.
Revenue came in at $370.3 million, below the Zacks Consensus
Estimate of $385 million. The revenue figure also reported a 13%
year-over-year drop. The sluggish economic recovery remains an
overhang on the company's results and loan demand continues to be
weak.
On the other hand, provision for loan losses shrank to $1.0
million from $45.0 million in the prior quarter and $105.0 million
in the prior-year quarter.
Inside the Headline Numbers
Revenue decreased 5% sequentially to $370.3 million, due to a 5%
decline in net interest income, which was partially offset by a 3%
increase in non-interest income. Net interest margin increased 4
bps both sequentially and year over year to 3.22%. The company
continued to experience lower outstanding loan balances.
Nevertheless, non-interest expense decreased 4% sequentially to
$315.1 million. The improvement was fuelled by lower compensation,
reduced mortgage repurchase expense and productivity and efficiency
gains from technology investments and improvements to business
processes and procurement.
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 loan charge-offs and non-performing assets were
down in the first quarter to the lowest levels in three years.
Net charge-offs were down 23% sequentially to $76.7 million. Net
charge-offs as a percentage of average loans were 1.90%, down 48
basis points (bps) from the prior quarter. Non-performing assets
decreased 2% sequentially to $819.0 million.
Evaluation of Capital
During the first quarter, First Horizon repurchased the warrant
issued to the U.S. Department of the Treasury in 2008 under the
Capital Purchase Program.
Tier 1 capital ratio was 14.19%, up from 13.99% in the prior
quarter. Tangible common equity ratio decreased 2 bps sequentially
to 8.91%. Book value came in at $8.90 per share, down from $9.05
per share reported in the prior quarter.
Dividend
Earlier this week, the company announced a 1 cent per share
quarterly cash dividend. The dividend is payable on July 1, 2011 to
the common shareholders of record on June 10, 2011.
Our Take
Lower credit costs have been the trend in first quarter results.
Wall Street biggies such as U.S. Bancorp (USB) and
Citigroup Inc. (C) have benefited from credit
quality improvement. These banks have reduced their loan provisions
and results could match or exceed market expectations. However,
revenue growth remains elusive at many of the Wall Street banks and
we do not expect a significant turnaround in the near term.
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.
Recently, First Horizon is shedding its insurance unit. The
company has announced its agreement to sell First Horizon Insurance
Inc. to insurer Brown & Brown Inc. (BRO),
through its principal subsidiary First Tennessee Bank. The move
came as part of its effort to improve its focus on banking and
capital markets.
Though the wind-down of the non-strategic part of the loan
portfolio bodes well, we believe that it will remain a drag on the
company's earnings in the near future. A shrinking revenue base,
mortgage repurchase risk and regulatory issues remain our
concerns.
First Horizon currently retains a Zacks #3 Rank, which
translates into a short-term 'Hold' rating.
BROWN & BROWN (BRO): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
FIRST HRZN NATL (FHN): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
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