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First Horizon (FHN) Down 4.06% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for First Horizon National Corporation FHN. Shares have lost about 4.1% in the past month, underperforming the market .

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

First Horizon Tops Q4 Earnings, Records Tax Expense

First Horizon reported fourth-quarter 2017 adjusted earnings per share of 30 cents, surpassing the Zacks Consensus Estimate of 29 cents by 3.4%. Results exclude tax reform-related adjustments and other one-time items.

Including these adjustments, the company reported net loss available to common shareholders of $52.8 million or 20 cents per share against net income of $53.3 million or 23 cents recorded in the prior-year quarter.

Organic growth was reflected, aided by higher loans and deposits balances benefiting revenues. Also, rise in margins supported the results. However, rise in expenses and provisions remained a major drag.

For 2017, net income available to common shareholders was approximately $159.3 million or 65 cents per share compared with $220.8 million or 94 cents reported in the prior-year period. On an adjusted basis, earnings came in at $271.2 million or $1.11 per share.

Segment wise, quarterly net income at Regional Banking and Fixed Income segments jumped 31% and 1% year over year, respectively. The Non-Strategic segment witnessed net loss against net income recorded in the year-ago period, while Corporate segment reported net loss in both the quarters.

Higher Revenues Offset Rise in Expenses

For 2017, total revenues came in at $1.3 billion, up 4% on a year-over-year basis.

Total revenues for the quarter were $375.3 million, up 17% year over year. However, the figure missed the Zacks Consensus Estimate of $385 million.

Net interest income for the quarter jumped 24% year over year to $242.1 million. Net interest margin of 3.27% expanded 27 basis points (bps) from 3.00% in the prior-year quarter. Further, non-interest income climbed 7% year over year to $133.1 million, due to rise in almost all components of income.

Non-interest expenses flared up 46% year over year to $346.7 million, mainly due to rise in all components of expenses, partially offset by lower legal fees. Adjusted expenses were $258 million.

Efficiency ratio came in at 92.4% compared with 74.4% reported in the year-earlier quarter. A rise in efficiency ratio indicates lower profitability.

Total loans, net of unearned income, came in at $27.7 billion, up 41% from the prior-year quarter. Total deposits amounted to $30.6 billion, up 35% year over year.

Credit Quality: A Mixed Bag

During the quarter, the company recorded $3 million provision for loan losses as against nil provision in the prior-year quarter. Also, non-performing assets rose 8% year over year to $177.2 million. The quarter witnessed net charge-offs of $8.3 million against recoveries of $0.5 million recorded in the comparable quarter last year.

Yet, allowance for loan losses was down 6% year over year to $189.6 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses was 0.69%, down 34 bps.

Strong Capital Position

Tier 1 common equity ratio was 8.68% compared with 9.94% reported at the end of the prior-year quarter. Also, tier 1 capital ratio was 9.64% compared with 11.17% in the year-ago quarter.

As of Dec 31, 2017, return on assets (ROA) was 0.59% while adjusted ROA was 0.96%. Return on tangible common equity was 7.2% while adjusted was12.6%.

Long-term Bonefish Targets:

ROTCE is expected to be more than 15%. Return on assets to be in the range of 1.1-1.3%.  Common equity Tier 1 ratio is likely to be in 8-9% range, while NCO/average loans to be 0.20-0.60%. Moreover, net interest margin is anticipated in 3.25-3.50% range, while fee income to revenue ratio to be 30-40%. Further, efficiency ratio is expected to be 60-65%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to two lower.

 

VGM Scores

At this time, FHN has a subpar Growth Score of D, however its Momentum is doing a bit better with a C. Charting a somewhat similar path, the stock was also allocated a grade of B on the value side, putting it in the second quintile 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.

Our style scores indicate that the stock is more suitable for value investors than momentum investors.

Outlook

Estimates have been broadly trending downward for the stock. Notably, FHN has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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