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First Horizon Earnings Beat on Lower Expenses

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Driven by prudent expense management, First Horizon National Corp. (FHN - Free Report) reported first-quarter 2014 earnings per share of 19 cents, outpacing the Zacks Consensus Estimate by 4 cents. Moreover, results compared favorably with the year-ago figure of 17 cents per share.

Shares of First Horizon increased more than 1% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the full trading session will give a better idea about whether First Horizon has been able to meet expectations.

Our proven model predicted that First Horizon will post an earnings beat as it has the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold).

First Horizon’s results reflected lower-than-anticipated expenses. Moreover, improvement in the credit quality was recorded. However, reduced revenues were a concern.

Net income available to common shareholders was $44.9 million, up 10% from the prior-year quarter.

Quarter in Detail

Total revenue came in at $298.1 million, down 6% from the year-ago quarter, due to lower net interest as well as non-interest income. However, revenues surpassed the Zacks Consensus Estimate of $290.0 million.

On a fully taxable equivalent basis, net interest income declined 5.5% year over year to $154.3 million. Net interest margin decreased 7 basis points year over year to 2.88%.

Non-interest income slipped 10% from the prior-year quarter to $140.1 million. Non-interest expense declined 8% from the prior-year quarter to $220.2 million.

Period-end loans, net of unearned income declined 5% year over year to $15.1 billion. However, total deposits rose 3% to $16.7 billion compared with the prior-year quarter.

Credit Quality

Overall, First Horizon’s credit quality metrics improved in the reported quarter. Allowance for loan losses were down 7% year over year to $247.2 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.64%, down 3 basis points year over year.

Further, the company’s provision for loan losses declined 33% year over year to $10 million. Net charge-offs fell 38% on a year-over-year basis to $16.6 million. As a percentage of average loans and on an annualized basis, net charge-offs was 0.45%, down 22 basis points on a year-over-year basis. Moreover, nonperforming assets dipped 1% year over year to $345.5 million.

Evaluation of Capital

First Horizon’s capital ratios remained at strong levels. Adjusted tangible common equity ratio to risk weighted assets was 10.61% versus 9.93% as of Mar 31, 2013. Moreover, book value per share came in at $9.10, compared with $9.16 in the prior-year quarter. Tier 1 ratio was 14.20% compared with 13.56% in the prior-year quarter.

Our Viewpoint

First Horizon’s endeavors to lower its exposure to problem loans are impressive. It also aims to control costs and improve long-term profitability by focusing on strengthening its core Tennessee banking franchise.

However, though winding down of the non-strategic part of First Horizon’s loan portfolio bodes well, it will remain a drag on the company earnings going forward. In addition to a shrinking revenue base, regulatory issues, a tepid economic recovery and low interest rate environment will challenge its performance.

First Horizon currently carries a Zacks Rank #3 (Hold). Among other Southeast banks, BancorpSouth, Inc. (BXS - Free Report) is scheduled to announce first-quarter results on Apr 21, while WesBanco Inc. (WSBC - Free Report) and Regions Financial Corporation (RF - Free Report) will announce on Apr 22.

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