First Horizon Tumbles on TARP Repay - Analyst Blog

First Horizon National Corporation (FHN) has swung to a loss in the fourth quarter following the TARP repayment in late December. The company reported a loss of $49.0 million or 20 cents per share, significantly 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 $70.6 million or 30 cents a share, a year ago.

Fourth results included a $63 million of negative impact associated with the company's exit from the Troubled Asset Relief Program. The company repurchased its TARP preferred shares after raising capital in the equity and debt markets.

For full year 2010, First Horizon reported net loss of $57.8 million or 25 cents per share, missing the Zacks Consensus Estimate of a loss of 8 cents per share.

Besides TARP repayment, First Horizon's results also tumbled as a result of lower-than expected revenues in the quarter, driven by a fall in non-interest income. However, a decrease in loan loss provisions coupled with a drop in expenses were the positives.

Revenue came in at $393.2 million, below the Zacks Consensus Estimate of $425 million. The revenue figure also reported a drop of 10% year over year. The sluggish economic recovery continues to remain an overhang on the company's results and loan demand remains weak. On the other hand, provision for loan losses shrank to $45.0 million from $50.0 million in the prior quarter and $135.0 million in the prior-year quarter.

Inside the Headline Numbers

Revenue decreased 9% sequentially to $393.2 million, driven by a 2% decline in net interest income and a 22% decrease in non-interest income. Net interest margin fell 5 bps sequentially to 3.18%. The company continued to experience lower outstanding loan balances.

Nevertheless, non-interest expense decreased 4% sequentially to $334.8 million. Expenses in the non-strategic segment fell as First Horizon continues to wind down these businesses.

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 10% sequentially to $100.1 million. Net charge-offs as a percentage of average loans were 2.38%, down 25 basis points (bps) from the prior quarter. Non-performing assets decreased 9% sequentially to $836.5 million.

Evaluation of Capital

During the fourth quarter of 2010, First Horizon repurchased of $867 million of TARP preferred stock following the completion of stock and debt offerings in which the company raised more than $750 million. As a result, the capital ratios bear that impact.

Tier 1 capital ratio was 13.96%, down from 17.34% in the prior quarter. While tangible common equity ratio increased 97 bps sequentially to 8.93%, book value came in at $9.05 per share, down from $9.28 per share reported in the prior quarter.

Returns to Quarterly Cash Dividend

Earlier this week, First Horizon announced that its board of directors has approved payment of a quarterly cash dividend on its common stock of 1 cent per share. The dividend is payable on April 1, 2011, to the common shareholders of record on March 11, 2011. This marks a return to paying the quarterly dividend in cash. Since October 1, 2008, First Horizon has distributed its quarterly dividend in the form of stock dividends.

Our Take

The TARP repayment is a definite positive for the stock as it removes the government overhang factor. Besides First Horizon, Huntington Bancshares Inc. (HBAN) repaid the TARP loan in late December following stock offering. Recently, Fifth Third Bancorp (FITB) also disclosed its capital raise initiatives for the TARP repay.

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, mortgage repurchase risk and regulatory issues remain our concern.

First Horizon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

However, a loss and earnings estimate miss is discouraging and the First Horizon stock is trading at a discount in the market session in the New York Stock Exchange.

 
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