First Horizon National ( FHN) shares were slipping 3% Friday morning after the bank extended its quarterly loss both sequentially and year-over-year.

First Horizon reported a third-quarter net loss of $118 million, or 59 cents per diluted share, losing far more than the Thomson Reuters consensus expectation of a 15-cents-per-share loss.

The third-quarter loss followed a second quarter net loss of $19 million and a loss of $14 million in the third quarter of 2007. This was the Memphis, Tenn. holding company's fourth net loss over the past five quarters.

Shares were recently falling 3% to $10.98. The results come a day after regional bank peers Huntington Bancshares ( HBAN), BB&T Corp. ( BBT) and PNC Financial Services Group ( PNC) posted mixed results.

First Horizon announced back in June an agreement to sell 230 loan origination offices to MetLife Bank, NA (a subsidiary of MetLife Inc. ( MET), as part of its effort to wind down its mortgage lending and servicing business outside of Tennessee and reduce its balance sheet to preserve capital strength. The repositioning also includes winding down consumer and construction lending outside its "regional banking footprint."

The actions in the third quarter reduced the company's full-time employee headcount by a third, to 6,091 as of Sept. 30.

Asset Quality

Not surprisingly, the main factor in the worsening earnings situation was an increase in First Horizon's loan loss provision to $340 million, from $220 million last quarter. The provision exceeded the company's net loan charge-offs of $155 million by a comfortable margin, but overall asset quality continued to deteriorate.

First Horizon reported nonperforming assets, including nonaccrual loans and foreclosed real estate, totaling $1 billion as of Sept. 30, an increase of 16% from the previous quarter. The company reported a nonperforming assets ratio of 4.63% as of Sept. 30, increasing from 3.88% in June and 1.13% in September 2007.

Looking at actual loan losses, the annualized ratio of net charge-offs to average loans for the quarter was 2.84%, and loan loss reserves covered 3.63% of total loans (excluding government-guaranteed balances).

The great majority of First Horizon's nonperforming loans were residential construction loans, split between builder and condominium construction loans, and consumer residential construction loans, outside of Tennessee.

Capital Resources

The company's $660 million capital raise in the second quarter and continued balance sheet reduction have kept First Horizon's capital ratios on an upward path. The leverage ratio was 8.86% as of Sept. 30, rising from 8.45% in June and 7.12% in September 2007. The company's estimated risk-based capital ratio was 15.82% as of Sept. 30, up from 15.15% last quarter and 12.85% a year ago.

In First Horizon's earnings release, CEO Bryan Jordan expressed confidence in First Horizon's core banking franchise in Tennessee. He also alluded to the possibility of further capital raising and maybe asset sales.

"We're also carefully examining opportunities to participate in the new programs offered by the Treasury, which we think are steps in the right direction to restoring confidence in the financial system," he said.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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