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First Horizon (FHN) Stock Slips Despite Q3 Earnings Beat


First Horizon National Corporation FHN posted earnings per share of 27 cents for third-quarter 2016, surpassing the Zacks Consensus Estimate of 25 cents. Moreover, the figure represents an increase of 8.0% over the year-ago quarter.

However, the company’s stock declined 1.7%, following the earnings release. Rising operating expenses and a significant increase in provisions for loan losses have made investors’ apprehensive on the stock.

Nevertheless, better-than-expected results were aided by a rise in both net interest income and non-interest income. Also, strong growth in loans and deposits supported the top line. Moreover, the company recorded a one-time gain of $4.4 million related to recoveries in prior mortgage servicing sales and a $4.3 million gain from reversal of litigation accrual.

Net income for the quarter amounted to approximately $67.6 million, up 7.0% from the prior-year quarter.

Segment-wise, net income at Regional Banking jumped 18.2% year over year to $65.0 million. Meanwhile, net income for Fixed Income amounted to $9.5 million, compared to a net loss of 2.7 million in the year-ago quarter. However, net loss at the Corporate segment totaled $11.2 million, compared to a net gain of $2.7 million in the prior-year quarter. Also, the Non-Strategic segment recorded a 49.0% plunge in net income to $4.3 million.

Rising Improve, But Expenses Rise

Total revenue for the quarter came in at $333.7 million, up 16% year over year. The rise was attributable to an increase in net interest income as well as fee income. Moreover, revenues surpassed the Zacks Consensus Estimate of $327.0 million.

Net interest income increased 13.0% year over year to $185.2 million, primarily due to higher commercial loans in specialty lending areas. Net interest margin was 2.96%, up 11 basis points (bps) from the prior-year quarter’s figure of 2.85%. Non-interest income climbed 19.0% year over year to $148.5 million, due to increased average daily revenues in Fixed Income and higher fees in the Regional Bank segment.

However, non-interest expense rose 8.0% year over year to $233.6 million, primarily due to technology upgrades and increased personnel and marketing investments in expansion markets.

Efficiency ratio came in at around 70.0%, compared to 74.5% year over year. Note that a decline in efficiency ratio indicates improvement in profitability.

Total period-end loans, net of unearned income, came in at $19.6 billion, up 17% year over year. Also, total period-end deposits amounted to $21.6 billion, depicting a growth of 14% from the year-ago quarter.

Credit Quality: Mixed Bag

The company’s provision for loan losses was $4 million, substantially up from $1 million in the prior year quarter.

However, allowance for loan losses was down 4% year over year to $201.6 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.03%, down 23 basis points (bps) year over year.

Also, net charge-offs plummeted 80% on a year-over-year basis to $2.3 million. As a percentage of average loans and on an annualized basis, net charge-off was 0.05%, down 23 bps on a year-over-year basis. Moreover, non-performing assets dropped 20% year over year to $173.6 million.

Deterioration in Capital Ratios

Tier 1 common equity ratio was 9.79%, down from 10.71% at the end of the prior-year quarter.

Efficient Capital Deployment

During the quarter, First Horizon repurchased shares worth $7.1 million. Notably, the bank completed acquisition of around $537 million in franchise finance loans.

Our Viewpoint

First Horizon’s results do not reflect a strong quarter. However, appreciable growth in loans and deposits, along with improvement in the company’s credit quality, will likely supplement its financial strength. Also, steady capital deployment will help enhance investors’ confidence in the stock.

However, regulatory pressure, mortgage repurchase issues and a low interest rate environment are expected to pose near-term headwinds.

FIRST HRZN NATL Price, Consensus and EPS Surprise

FIRST HRZN NATL Price, Consensus and EPS Surprise | FIRST HRZN NATL Quote

At present, First Horizon carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other Southeast banks, Regions Financial Corp. RF and Hancock Holding Co. HBHC are scheduled to announce their third-quarter 2016 earnings on Oct 18, while Trustmark Corp. TRMK is slated to report earnings on Oct 25.

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