First Horizon (FHN) Shares Dip Despite Q3 Earnings Beat

First Horizon National Corp.FHN delivered a positive earnings surprise in the third quarter with earnings per share of 29 cents beating the Zacks Consensus Estimate by 31.8%. Moreover, the bottom line improved 52.6% year over year.

First Horizon National Corporation - Earnings Surprise | FindTheBest

The company's shares were, however, down 1.2%, following the release. We believe a significant deterioration in top-line performance made investors apprehensive on the stock. Notably, revenues for the quarter were down 9% year over year, and lagged the Zacks Consensus Estimate by 4%.

Nonetheless, lower revenues were more than offset by a steeper fall in expenses as well as provisions. Further, the quarter witnessed double-digit loan growth in its regional banking franchise, First Tennessee Bank, and a rise in the fixed-income sales revenues. Increase in deposits and improved credit quality were among the other major positives.

Results also benefited from a pre-tax gain of $8 million in employee benefit amendments as well as pre-tax gains of $6 million and $4.5 million attributable to debt retirement and tax credits, respectively.

As a result, net income available to common shareholders jumped 46% year over year to $67.2 million.

Segment-wise, third-quarter net income for Regional Banking increased 7% year over year to $54.8 million, while that for Fixed Income (formerly Capital Markets) jumped 38% year over year to $4.4 million. Moreover, Corporate reported net income of $4.1 million as against loss of $9.7 million recorded a year ago; while net income for the Non-Strategic segment jumped 50% to $8.4 million for the third quarter.

Performance in Detail

As previously mentioned, total revenue declined 9% year over year to $288.7 million. The fall was triggered by a dip in non-interest income, partially offset by an increase in net interest income. The Zacks Consensus Estimate for the same stood at $300.6 million.

Net interest income increased 2.5% year over year to $163.6 million. On the other hand, net interest margin ("NIM") edged down 12 basis points (bps) year over year to 2.85%.

Non-interest income declined 20.7% year over year to $125.1 million.

Non-interest expense summed $203.9 million, down 16% year over year, primarily driven by a fall in compensation costs.

Period-end loans, net of unearned income, increased 6% year over year to $16.7 billion. Complementing this, total deposits rose 17% year over year to $18.9 billion.

Credit Quality

First Horizon's credit quality showed overall improvement during the quarter. Allowance for loan losses fell 12% year over year to $210.8 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.26%, down 25 bps year over year.

Further, provision for loan losses dropped 83% year over year to $1 million. However, net charge-offs increased 5% on a year-over-year basis to $11.5 million.

As percentage of average loans and on an annualized basis, net charge-off remained stable at 0.28% on a year-over-year basis. But nonperforming assets slipped 15% year over year to $217.2 million.

Evaluation of Capital

First Horizon remained well-capitalized during the quarter. Tangible common equity to tangible assets (non-GAAP) stood at 8.04% as of Sep 30, 2015, compared with 7.80% as of Jun 30, 2015. Tier 1 common equity ratio was 10.80% as against 10.41% at the end of the prior quarter.

Share Repurchases

First Horizon did not buy back any shares during the third quarter, owing to restrictions related to its acquisition of TrustAtlantic Financial Corporation. Since inception of the $100-million share repurchase program announced in Jan 2014, the company has repurchased shares worth $54.3 million at a volume-weighted average price of $12.79 per share, inclusive of per share brokerage commission of 2 cents.

Our Viewpoint

Despite experiencing continued rise in expenses, First Horizon's cost-control initiatives are expected to boost its margins in the quarters ahead. Moreover, the company's focus on strengthening its profitable Tennessee banking franchise and exiting the non-strategic segment should augur well for the long term. At the same time, appreciable growth in loans and deposits, along with consistent improvement in the company's credit quality, is likely to supplement its financial strength.

However, continued winding up of businesses might drag earnings going forward. Further, a declining revenue base, regulatory pressure and low interest rate environment will continue to pose headwinds.

At present, First Horizon carries a Zacks Rank #3 (Hold).

Among other Southeast banks, Regions Financial Corp. RF and Hancock Holding Co. HBHC are scheduled to report third-quarter 2015 results on Oct 20 and Oct 22, respectively. Popular, Inc. BPOP , on the other hand, will release results on Oct 23.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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