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First Horizon Q2 Earnings Beat on Cost Control Initiatives

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Driven by prudent expense management, First Horizon National Corp. (FHN - Free Report) reported second-quarter 2014 adjusted earnings per share of 19 cents, outpacing the Zacks Consensus Estimate of 16 cents. Moreover, results compared favorably with the year-ago figure of 17 cents per share.

Including litigation expense recovery of after-tax $31.4 million or 13 cents per share, net income available to common shareholders was $76.8 million or 32 cents per share.

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

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

Quarter in Detail

Total revenue came in at $283.7 million, down 6% from the year-ago quarter. The decline was due to lower net interest as well as non-interest income. Moreover, results also lagged the Zacks Consensus Estimate of $285.0 million.

Net interest income declined 2% year over year to $156.8 million. Yet, net interest margin increased 1 basis point year over year to 2.97%.

Non-interest income slipped 10% from the prior-year quarter to $128.8 million. Non-interest expense declined 27% from the prior-year quarter to $165.3 million.

Period-end loans, net of unearned income declined 2% year over year to $15.8 billion. Moreover, total deposits declined 5% to $16.2 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 $243.6 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses was 1.54%, down 8 basis points year over year.

Further, the company’s provision for loan losses declined 67% year over year to $5 million. Net charge-offs fell 53% on a year-over-year basis to $8.6 million. As a percentage of average loans and on an annualized basis, net charge-offs was 0.22%, down 24 basis points on a year-over-year basis. Moreover, nonperforming assets dipped 21% year over year to $340.0 million.

Evaluation of Capital

First Horizon’s capital ratios remained at strong levels. Adjusted tangible common equity ratio to risk weighted assets was 10.70% versus 9.75% as of Jun 30, 2013. Tier 1 ratio was 14.20% compared with 13.28% in the prior-year quarter. Adjusted Tier 1 common ratio to risk weighted assets was 11.15% compared with 10.39 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.

Among other Southeast banks, BancorpSouth, Inc. (BXS - Free Report) is scheduled to announce second-quarter results on Jul 21, while Regions Financial Corporation (RF - Free Report) will announce on Jul 22 and WesBanco Inc. (WSBC - Free Report) on Jul 23.

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