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First Horizon (FHN) Up 6.2% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for First Horizon National (FHN). Shares have added about 6.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is First Horizon due for a pullback? 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 Q4 Earnings Miss Estimates, Costs Down

First Horizon reported fourth-quarter 2018 adjusted earnings per share of 35 cents, which lagged the Zacks Consensus Estimate of 36 cents. The figure, however, compares favorably with loss of 20 cents reported in the year-ago quarter.

Revenues improved and expenses declined on a year-over-year basis. Efficiency ratio also decreased during the quarter, reflecting increased profitability. However, rise in net charge-offs and provision for loan losses were the key undermining factors.

After considering certain non-recurring items, net income available to common shareholders for the quarter came in at $96.3 million, significantly higher than the loss of $52.8 million in the prior-year quarter.

Earnings per share for 2018 came in at $1.66, up from the year-earlier figure of 66 cents. Net income available to common shareholders was $538.8 million, significantly higher than the year-ago tally.

Segment wise, quarterly net income in regional banking segment surged 43.7% year over year to $118.5 million. Furthermore, fixed income and non-strategic segments reported net income of $1.4 million and $6.2 million, respectively. However, the corporate segment reported net loss of $25.3 million.

Revenues Rise, Expenses Decline

Total revenues for the quarter came in at $412.8 million, up 10% on a year-over-year basis. However, the top line missed the Zacks Consensus Estimate of $443 million.

Total revenues for 2018 came in at $1.94 billion, up 46% on a year-over-year basis. The full-year revenue figure also surpassed the Zacks Consensus Estimate of $1.78 billion.

Net interest income for the fourth quarter increased 30% year over year to $302.5 million. Net interest margin expanded 11 basis points (bps) to 3.38%. Non-interest income came in at $110.3 million, down 17.2% year over year.

Non-interest expenses decreased 18.7% year over year to $281.9 million.

Efficiency ratio came in at 68.3% compared with 92.41% 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 $27.5 billion, up marginally from the previous quarter. However, total period-end deposits were $32.7 billion, up 5% from the third quarter.

Credit Quality

Allowance for loan losses was down 5% year over year to $180 million. The quarter witnessed net charge-offs of $11.5 million compared with $8.3 million recorded in the prior-year quarter. However, as a percentage of period-end loans on an annualized basis, allowance for loan losses was 0.66%, down 3 bps year over year.

Further, non-performing assets edged down nearly 1% year over year to $175.4 million. However, during the quarter, the company recorded $6 million in provision for loan losses compared to $3 million recorded in the year-ago quarter.

Capital Position

Tier 1 common equity ratio was 9.75%, up from 8.88% at the end of the year-earlier quarter. Additionally, total capital ratio was 11.92%, up from 11.10% in the prior-year quarter.

Outlook

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%.
 
The company expects 35-70% total payout ratio.

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. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. 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 looks promising. It's no surprise First Horizon has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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