First Horizon National Corporation (FHN) turned to profitability in its second quarter after reporting losses in the past eight quarters.

The company reported net income of $2.7 million or 1 cent per share, which compares favorably with the Zacks Consensus Estimate at a loss of 9 cents. The company incurred a net loss of $27.7 million or 12 cents per share in the prior quarter and a loss of 54 cents in the year-ago quarter.

The better-than-expected results were primarily driven by a decrease in loan loss provisions and an increase in mortgage banking income. However, the sluggish economic recovery continues to remain an overhang on the company’s results. There was weak demand for loans while fee income remained under pressure as well.

Provisions for loan losses shrank to $70.0 million from $105.0 million in the prior quarter and from $260.0 million in the year-earlier quarter.

Credit Quality

Credit quality improved in the quarter, primarily driven by an improvement in the commercial and industrial loan portfolios. The company continued with its efforts to wind down the higher-risk non-strategic portfolios.

Net charge-offs were down 27% sequentially and 45% year over year to $132.8 million. Net charge-offs as a percentage of average loans were 3.10%, down from 4.13% in the prior quarter and 4.77% in the year-ago quarter. Nonperforming assets (NPA) dropped 14% sequentially and 27% year over year to $899.8 million. The NPA ratio decreased to 4.92% from 5.63% in the prior quarter and 6.15% in the year-ago quarter.

Inside the Headline Numbers

Total revenue remained flat sequentially but decreased 11% year over year to $430.1 million. Though net interest income reported a 1% rise sequentially, it fell 9% year over year to $182.1 million. The company continued to experience lower outstanding loan balances.

However, the company experienced a slight increase in deposits. Net interest margin of 3.19% was flat sequentially, primarily due to a higher average excess balance at the Fed that curbed margin growth. Net interest margin was, however, up 14 basis points (bps) year over year.

Non-interest income was slightly down (0.1%) sequentially, but dropped 13% year over year to $248.0 million. On a sequential basis, while the first quarter results included a gain from the repurchase of bank debt, the capital markets’ fixed income sales revenue decreased. However, an increase in mortgage revenues from the prior quarter and a seasonal increase in deposit transaction fee income aided in toning down the drop in non-interest income.

Non-interest expense remained flat sequentially but decreased 15% year over year to $341.8 million, reflecting the implementation of several restructuring initiatives in the past several quarters.

Capital Ratios

Capital levels remained good. Tier 1 capital ratio was 16.77% (estimate), up 19 bps sequentially and up 122 bps year over year. Tangible common equity ratio was 7.63%, down 4 bps sequentially but up 36 bps year over year. Book value came at $9.55 per share, up from $9.51 at the end of the prior quarter but down from $10.12 in the year-ago quarter.

Our Take

First Horizon executed several strategic repositioning efforts to improve long-term profitability by focusing on growing its core Tennessee banking franchise. It implemented a number of strategic initiatives over the last several quarters to reduce its exposure to problem loans, control expenses and boost capital levels.

However, our worries remain about a shrinking revenue base. First Horizon continues to witness weak demand for its loans and, additionally, its fee income stream remains under pressure.

Though the wind-down of the non-strategic part of the loan portfolio augurs well, we believe that it will remain a drag on the company’s earnings in the near future. Given our outlook for a slow and protracted economic recovery, we expect the top line to remain restricted in the near future.

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