RF Regions Financial Corporation

We have downgraded our recommendation on First Horizon National Corp. (FHN) to Underperform from Neutral as the company suffered a loss in the fourth quarter of 2010 following the repayment of the bailout money in late December 2010.

FHN reported a loss of $49.0 million or 20 cents per share, significantly higher than the Zacks Consensus Estimate of a loss of 2 cents. Results, however, compared favorably with the prior-year quarter’s loss of $70.6 million or 30 cents per share. Fourth-quarter results included a negative impact of $63 million related to the company’s exit from the Troubled Asset Relief Program (TARP). The company repurchased its TARP preferred shares after raising capital from the equity and debt markets.

Besides TARP repayment, FHN’s results also tumbled owing to lower-than-expected revenues in the quarter, driven by a fall in non-interest income. However, decrease in loan loss provisions coupled with a drop in expenses, were encouraging.

FHN continues to experience a shrinking revenue base, with both interest income 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 forecasted to remain low for an extended period, we believe expansions in interest margin would be limited.

Further, FHN has a significant exposure to problem loan categories, such as commercial and industrial and commercial mortgage. The company has been worst affected by losses from these exposures. Though credit trends are improving of late, we expect the pace of improvement to be slow as the economy is likely to revive at a sluggish rate.

On the flip side, FHN has executed several strategic repositioning efforts to improve its long-term profitability. For example, the company was severely impacted resulting from its exposure to national mortgage and construction lending, and so it decided to exit these business lines and focus on growing its core Tennessee banking franchise. We believe that such repositioning efforts would help the company to reallocate the capital, which is associated with such problem businesses, into its core markets, thereby improving the long-term profitability.

Further, credit quality measures, although still high, continued to show improvement, with the company reporting a decline in nonperforming assets, charge-offs and loan loss provisions for the fifth consecutive quarter due to a reduction in the national construction portfolio. Going forward, we expect FHN’s strategic initiatives to improve the asset quality with continued reserve releases.

Though the wind-down of the non-strategic part of the loan portfolio augurs well, we believe that it will remain a drag on FHN's earnings in the near future.

FHN currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. The company’s closest peer – Regions Financial Corp. (RF) also retains a Zacks #3 Rank (a short-term ‘Hold’ rating).

 
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