First Horizon National Corp , the largest bank in Tennessee with over $26 billion in assets, posted a surprise profit, helped by improving credit quality and said the overhaul of U.S. financial rules will not affect its capital position.

The elimination of trust preferred securities (TRuPs) as a source of Tier 1 capital should not materially affect our capital position, Chief Executive Bryan Jordan said on a conference call with analysts.

He added TRuPs accounted for only $300 million, or 144 basis points, of the lender's Tier 1 ratio of 16.8 percent.

The financial regulation which was passed by the Senate on Thursday requires banks with more than $15 billion in assets to stop counting holdings in trust preferred securities as part of their Tier 1 capital, a key measure of the balance-sheet strength of a financial firm.

Jordan said the bank has opportunities for acquisitions, through Federal Deposit Insurance Corp (FDIC)-assisted deals or through whole bank transactions.

Stifel Nicolaus & Co analyst Anthony Davis said, they have, by our estimates, around $250 million in excess capital. I think the first call on that capital will be some bank to acquire with FDIC assistance.

CREDIT QUALITY IMPROVES

In a sign of improving credit quality, provision for credit losses fell 73 percent to $70 million, while net charge-offs fell 45 percent to $132.8 million.

The company said 2010 net charge-offs and reserves should be lower than 2009 levels.

However, it said the income Commercial Real Estate (CRE) portfolio was likely to remain at current stressed performance levels into 2010.

They are still expecting stress in CRE, but outside that segment the credit trends will continue to improve noticeably, analyst Davis said.

For the second quarter, net profit available to common shareholders was $2.7 million, or 1 cent a share, compared with a loss of $123.2 million, or 54 cents a share a year ago.

Analysts on average were expecting a loss of 9 cents a share, before items, according to Thomson Reuters I/B/E/S.

Overall, this is definitely a better-than-expected quarter. That is why this is one of the few regional bank stocks that is actually up today, Raymond James analyst Michael Rose said.

Shares of the Memphis, Tennessee-based bank, which rose 1 percent to $12.29 in morning trade on the New York Stock Exchange, gave up those gains and were trading down 9 cents at $12.02 by midday. The KBW regional bank index <.KRX> was down more than 3 percent.

(Reporting by Jochelle Mendonca; Editing by Roshni Menon; Unnikrishnan Nair)

Tennessee