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First Horizon National Corp. (FHN - Analyst Report) reported first-quarter 2013 earnings per share of 17 cents, in line with the Zacks Consensus Estimate of 17 cents, but well ahead of the year-ago earnings of 12 cents.
The results were driven by lower non-interest expenses, reflecting the company’s expense control measures. However, the pressure on revenue growth persisted owing to declining net interest as well as non-interest income. Further, considerably higher provision for credit losses was another dampener.
First Horizon reported net income available to common shareholders of $45.0 million, up 35% from $33.4 million reported in the prior-year quarter.
Total revenue came in at $317.8 million, missing the Zacks Consensus Estimate of $330.0 million. Moreover, revenues fell 15% from the year-ago quarter.
First Horizon’s provision for loan losses elevated 88% to $15 million in the quarter under review.
Quarter in Detail
Net interest income went down 6% year over year to $161.4 million. Net interest margin dipped 17 basis points (bps) year over year to 2.95%. Non-interest income slipped 23% from the prior-year quarter to $156.4 million.
However, non-interest expense declined 25% from the prior-year quarter to $240.5 million. For the reported quarter, the impact from First Horizon’s expense control measures yielded positive results. Personnel costs decreased following the completion of the voluntary separation program on Mar 31 and earlier modifications to the pension plan.
Further, First Horizon’s efficiency ratio decreased to 75.7% from 86.1% in the prior-year quarter. A decline in efficiency ratio indicates better profitability.
Period-end loans were down 1% year over year to $15.9 billion. Moreover, total deposits declined 4% year over year to $16.2 billion.
First Horizon’s credit quality metrics generally improved in the quarter under review. Allowance for loan losses were down 23% year over year and 4% sequentially to $265.2 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 1.67%, down 50 bps from the prior-year quarter and up 1 basis point from the prior quarter.
Net charge-offs went down 42% on a year-over-year basis but elevated 35% sequentially to $26.7 million. As a percentage of average loans and on an annualized basis, net charge-offs were 0.67%, down from 1.16% reported in the year-ago quarter but up from 0.48% in the prior quarter.
Non-performing assets fell 18% year over year and inched down 0.2% sequentially to $418.4 million. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets came in at 1.81%, down 75 bps year over year and 3 bps sequentially.
Evaluation of Capital
First Horizon’s capital ratios remained a mixed bag in the reported quarter. Adjusted tangible common equity ratio to risk weighted assets was 9.88%, down from 10.88% as of Mar 31, 2012 and from 9.93% as of Dec 31, 2012. Also, book value came in at $9.16 per share, down 3% from $9.42 per share in the prior-year quarter but up 1% from $9.09 in the year-ago quarter.
Capital Deployment Update
First Horizon continued its healthy capital deployment activities. The company repurchased $30.0 million worth common shares during the quarter under its $300 million share repurchase program.
On Mar 12, First Tennessee Bank – a subsidiary of First Horizon – announced that it will strategically expand its footprint and develop its services in N.C., S.C. and Va. Earlier, First Tennessee Bank forayed into Mid-Atlantic Region to recreate the success of the existing locations in West, Middle and East Tennessee. The regional bank is focused on opportunistically diversifying its footprints in regions with vast growth potential to combat declining revenues.
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 shrinking revenue base, regulatory issues, tepid economic recovery along with a low interest rate environment serve as headwinds for its results.
Yet, First Horizon’s endeavor to lower its exposure to problem loans is impressive. It is also aiming at controlling costs and improving long-term profitability by focusing on strengthening its core Tenn. banking franchise, which would augur well going forward. Moreover, share buybacks boost investors’ confidence in the stock.
First Horizon retains a Zacks Rank #3 (Hold). Other Southeast banks that are performing better than First Horizon are BNC Bancorp (BNCN - Snapshot Report), Pinnacle Financial Partners Inc. (PNFP - Snapshot Report) and Crescent Financial Bancshares, Inc. . All these stocks carry a Zacks Rank #1 (Strong Buy).