We are reiterating our Neutral recommendation on First Horizon National Corporation (FHN) following the company’s earnings release. The reaffirmation is based on the company’s business model, strategic efforts, credit environment and regulatory issues.
Second Quarter Performance
First Horizon turned to profitability in the second quarter of 2010 after reporting losses for eight quarters previously. The company reported a net income of $2.7 million or 1 cent per share, which compares favorably with the Zacks Consensus Estimate of a loss of 9 cents. The better-than-expected results were primarily driven by a decrease in loan loss provisions and an increase in mortgage banking income.
First Horizon executed several strategic repositioning efforts to improve long-term profitability by focusing on growing its core Tennessee banking franchise. It implemented a number of strategic initiatives over the last several quarters to reduce its exposure to problem loans, control expenses and boost capital levels.
However, First Horizon continues to experience a shrinking revenue base with both interest income and fee income remaining curtailed. Demand for loans was persistently weak. Given the challenging economic environment and our outlook for a protracted economic recovery, we expect the top line to remain restrained in the near future. Additionally, with interest rate also forecasted to remain low for an extended period, we believe expansions in interest margin would be limited.
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 improvements in the asset quality due to the company’s strategic initiatives.
However, First Horizon’s exposure to problem loan categories and regulatory issues will remain an overhang. The passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 would impact both top and bottom lines of the company. Additionally, being a recipient of bailout money, the company is subject to significant government interventions.
First Horizon currently carries a Zacks #3 Rank (Hold), implying no clear directional pressure on the stock over the next one to three months. Based on both the positive and the negative aspects of retaining this share in an investor’s portfolio, we have a long term Neutral recommendation on the stock.