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First Horizon (FHN) Down 0.2% Since Last Earnings Report: Can It Rebound?

Published 11/14/2018, 09:30 PM
Updated 07/09/2023, 06:31 AM

A month has gone by since the last earnings report for First Horizon National (FHN). Shares have lost about 0.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is First Horizon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

First Horizon Q3 Earnings Match Estimates, Costs Up

First Horizon reported third-quarter 2018 adjusted earnings per share of 36 cents, in line with the Zacks Consensus Estimate. The bottom line reflects an increase of 12.5% from the year-ago quarter.

Revenues improved year over year supported by an expanded net interest margin. Efficiency ratio also rose during the quarter, signaling increased profitability. However, substantial rise in expenses and weakening of capital position were the key undermining factors.

After considering the effect of gain from sale of Visa (NYSE:V) shares and various expenses related to the Capital Bank acquisition, net income available to common shareholders was $270.3 million or 83 cents per share, up from $67.3 million or 28 cents per share the prior-year period.

Segment wise, quarterly net income in the regional banking segment surged 74% year over year to $127.6 million. Also, net income for corporate segment increased 97% to $133.4 million from the year-ago quarter mostly due to a $161.8 million pre-tax gain on sale of Visa shares recognized in the quarter. Furthermore, fixed income and non-strategic segments reported net income of $2.3 million and $11.5 million, respectively.

Increase in Revenues Offset by Elevated Expenses

Excluding gain on sale of Visa shares, total adjusted revenues for the quarter came in at $441.8 million, up 31.1% on a year-over-year basis. However, the top line lagged the Zacks Consensus Estimate of $448.6 million.

Net interest income for the quarter increased 46% year over year to $305.7 million. Net interest margin expanded 25 basis points (bps) to 3.44%.

Non-interest income came in at $349 million, up 210% year over year, largely due to $212.9 million gain from the sale of Visa shares. Excluding this one-time gain, adjusted non-interest income was $136.1 million, up 7.1% year over year.

Non-interest expenses flared up 24% to $294 million due to rise in almost all the components, except other costs.

Efficiency ratio came in at 66.55% compared with 73.51% reported in the year-ago quarter. It should be noted that a fall in the efficiency ratio indicates increase in profitability.

Total period-end loans, net of unearned income, came in at $27.4 billion, down 1% from the previous quarter. However, total period-end deposits remained stable at $31 billion.

Credit Quality: A Mixed Bag

Allowance for loan losses was down 5% year over year to $186 million. The quarter witnessed net charge-offs of $1.5 million compared with $2.4 million recorded in prior-year quarter. Also, as a percentage of period-end loans on an annualized basis, allowance for loan losses was 0.68%, down 29 bps year over year.

However, non-performing assets increased 27% year over year to $177.8 million. Also, during the quarter, the company recorded $2 million in provision for loan losses compared with no provision in the prior-year quarter.

Capital Position Weakens

Tier 1 common equity ratio was 9.86%, down from 10.04% at the end of the year-earlier quarter. Additionally, total capital ratio was 12.04%, down from 12.18% in year-ago quarter.

Share Repurchases

During the reported quarter, First Horizon repurchased 1.1 million shares for $19 million.

Outlook

Management expects Capital Bank merger to be accretive to EPS by 17% in 2019, up from 8% it originally expected. In 2018, total cost savings of $53 million are expected to be delivered while another $85 million is likely to be achieved in 2019.

In 2019, ROTCE is expected to be in the range of 17-18% and return on assets to be in the range of 1.20-1.30%. Further, common equity Tier 1 ratio is likely to be in 9.5-10% range. Also, NIM is projected to be in 3.40-3.50% range and efficiency ratio is anticipated to be 60-62%. NCOs are expected to be less than 10 basis points. Additionally, the company expects loans and deposits to grow 3-6%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, First Horizon has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, First Horizon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



First Horizon National Corporation (FHN): Free Stock Analysis Report

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