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First Horizon National Corp. (FHN - Analyst Report) reported second-quarter 2013 earnings per share of 17 cents, missing the Zacks Consensus Estimate of 19 cents, but well ahead of the year-ago loss of 50 cents. Net income was $45.2 million, versus a loss of $121.9 million in the prior-year quarter.

First Horizon’s results reflected lower revenues due to a reduction in both net interest as well as non-interest income. Additionally, deteriorating capital position was a headwind. However, lower expenses were a positive for the quarter.

Total revenue came in at $302.6 million, missing the Zacks Consensus Estimate of $322.0 million. Moreover, revenues fell 9% from the year-ago quarter.

First Horizon’s provision for loan losses remained stable year over year at $15 million.

Quarter in Detail

On a fully taxable equivalent basis, net interest income fell 7% year over year to $161.9 million. Net interest margin fell 20 basis points (bps) year over year to 2.96%. Non-interest income slipped 7% from the prior-year quarter to $143.0 million.

However, non-interest expense declined 57% from the prior-year quarter to $227.4 million. First Horizon’s expense control measures yielded positive results for the quarter.

Further, the company’s efficiency ratio decreased to 75.05% from 161.45% in the prior-year quarter. A decline in efficiency ratio indicates rise in profitability.

Period-end loans inched up 0.1% year over year to $16.2 billion. Moreover, total deposits increased 7% year over year to $17.0 billion.

Credit Quality

First Horizon’s credit quality metrics, on the whole, improved in the said quarter. Allowance for loan losses were down 18% year over year and 1% sequentially to $261.9 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 1.62%, down 36 bps from the prior-year quarter and up 5 bps from the prior quarter.

Net charge-offs went down 54% on a year-over-year basis and 32% sequentially to $18.3 million. As a percentage of average loans and on an annualized basis, net charge-offs were 0.46%, down from 1.01% reported in the year-ago quarter and from 0.67% in the prior quarter.

Nonperforming assets rose 9% year over year and 21% sequentially to $506.7 million. As a percentage of period-end loans plus foreclosed real estate and other assets, nonperforming assets came in at 2.25%, down 7 bps year over year but up 44 bps sequentially.

Evaluation of Capital

First Horizon’s capital ratios deteriorated in the reported quarter. Adjusted tangible common equity ratio to risk weighted assets was 9.61%, down from 9.97% as of Jun 30, 2012 and from 9.91% as of Mar 31, 2013. Moreover, book value came in at $8.96 per share, up 0.4% from $8.92 per share in the prior-year quarter but down 2% from $9.16 in the prior quarter.

Capital Deployment Update

First Horizon continued with its healthy capital deployment activities. The company repurchased $8.0 million worth common shares during the quarter. It also entered into a $40 million repurchase agreement that is anticipated to close in the third quarter.

Our Viewpoint

Although winding down of the non-strategic part of its loan portfolio bodes well, it will remain a drag on First Horizon’s earnings going forward. In addition to a shrinking revenue base, regulatory issues, a tepid economic recovery and low interest rate environment will be headwinds for its results. Further, strategic expansion such as the addition of $433 million of assets related to the acquisition in East Tennessee from the FDIC will be a growth driver for the company.

However, First Horizon’s endeavor to lower its exposure to problem loans is impressive. It is also aims to control costs and improve long-term profitability by focusing on strengthening its core Tennessee banking franchise, which would augur well going forward. Moreover, share buybacks boost investors’ confidence in the stock.

First Horizon currently carries a Zacks Rank #3 (Hold). Among other Southeast banks Capital City Bank Group Inc. (CCBG - Snapshot Report) is expected to announce results on Jul 22, whereas  1st United Bancorp, Inc. (FUBC - Snapshot Report) and WesBanco Inc. (WSBC - Snapshot Report) will report on Jul 23.
 

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