First Horizon (FHN) Up 11.6% 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 11.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.

First Horizon Q1 Earnings Miss Estimates on High Costs

First Horizon reported first-quarter 2020 adjusted earnings per share of 5 cents that missed the Zacks Consensus Estimate of 22 cents.

Results were affected by higher expenses and provisions. However, First Horizon’s improved deposit balance and higher revenues were tailwinds. In addition, efficiency ratio contracted during the quarter, indicating increased profitability.

Net income available to common shareholders was $12.1 million or 4 cents per share, down from $99 million or 31 cents per share recorded in the prior-year quarter.

Segment wise, quarterly net income for regional banking plunged 81% year over year to $21.2 million. The fixed income segment’s net income of $19.5 million increased by a wide margin from the year-ago quarter. Also, the non-strategic segment reported income of nearly $2 million, down 71% year over year. The corporate segment incurred net loss of $26.1 million.

Revenue Growth Offsets Higher Expenses

Total revenues for the first quarter were $477.6 million, up 10% on a year-over-year basis. Also, the top line surpassed the consensus estimate of $473.9 million.

Net interest income for the reported quarter improved 3% year over year to $302.8 million. Net interest margin shrunk 15 basis points (bps) to 3.16%.

Non-interest income was $174.7 million, up 24% year over year. The upsurge resulted by rise in fixed income, brokerage and trust services income.

Non-interest expenses increased 5% year over year to $311.3 million due to higher FDIC premium expense along with contract employment and outsourcing costs.

Efficiency ratio was 65.19% compared with 66.19% 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, totaled $33.4 billion, up 7% from the previous quarter. However, total period-end deposits were $34.4 billion, up 6% sequentially.

Credit Quality Deteriorated

Allowance for loan losses was $444.5 million, significantly up from $184.9 million year over year. In addition, non-performing assets increased 5% year over year to $189.8 million. Also, during the quarter, the company recorded $145.4 million in provision for loan losses, up considerably from $13.4 million a year ago.

Further, as a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.33%, up 67 bps year over year. The quarter witnessed net charge-offs of $7.2 million compared with $4.5 million in the prior-year quarter.

Capital Position

Common Equity Tier 1 ratio was 8.52% compared with 9.62% at the end of the year-earlier quarter. Additionally, total capital ratio was 10.75%, down year over year from 11.78%.

Outlook

Net interest margin might remain under pressure as the company expects LIBOR to continue declining.

It expects the majority of new loan growth to be driven by Paycheck Protection Program loans. Also, loans mortgage companies, given the industry dynamics related to COVID-19 impacts, are expected to come down meaningfully to $1.5-$2 billion from Mar 31 levels.

Risk weighted assets (RWA) are likely to go down in the second quarter as loans to mortgage company balances decline and new loan growth is driven primarily by PPP loans. With the expected reduction in RWA, the company expects CET1 ratio to move back more toward 9% in the second quarter.

Second-Quarter 2020 Outlook

Net interest margin might remain under pressure as the company expects LIBOR to continue declining.

It expects the majority of new loan growth to be driven by Paycheck Protection Program loans. Also, loans mortgage companies, given the industry dynamics related to COVID-19 impacts, are expected to come down meaningfully to $1.5-$2 billion from Mar 31 levels.

Risk weighted assets (RWA) are likely to go down in the second quarter as loans to mortgage company balances decline and new loan growth is driven primarily by PPP loans. With the expected reduction in RWA, the company expects CET1 ratio to move back more toward 9% in the second quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -54.55% due to these changes.

VGM Scores

At this time, First Horizon has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile 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 indicates a downward shift. It's no surprise First Horizon has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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