First Horizon National Corp.’s (FHN) first-quarter 2012 earnings of 12 cents per share came a penny below the Zacks Consensus Estimate. Results also compared unfavorably with earnings per share of 13 cents in the prior quarter and 15 cents in the year-ago quarter.
Results reflected elevated level of provision for loan losses and expenses. However, an uptick in revenue partially offset the negatives.
First Horizon’s net income available to common shareholders was $30.5 million in the reported quarter, down 13% sequentially and 24% year-over-year.
However, revenue came in at $374.4 million, up from the Zacks Consensus Estimate of $355 million. The revenue figure also advanced 4% sequentially and 1% year-over-year. Revenue was backed by growth in non-interest income, partially offset by a fall in net-interest income.
Provision for loan losses was $8.0 million, down 20% sequentially but up from $1.0 million in the prior year quarter.
Quarter in Detail
The sequential revenue increase of 4% at First Horizon was due to a 12% rise in non-interest income and higher net securities gains, partly offset by a 4% fall in net interest income. Moreover, the 1% year-over-year improvement in revenue was due to a 3% increase in non-interest income.
Net interest margin fell 11 basis points (bps) sequentially and 10 bps year-over-year to 3.12% in the reported quarter. Lower yields on the investment and fixed-rate loan portfolios led to the decline.
Period-end loans were down 3% sequentially and flat year over year. However, total deposits advanced 4% sequentially and 10% year over year.
Non-interest expense increased 3% both sequentially and year over year to $322.0 million. The increase was due to higher mortgage repurchase costs and higher variable compensation costs due to increased revenues at FTN Financial.
Credit Quality
Overall, credit quality was positive at First Horizon with most of metrics reporting an improving trend. Allowance for loan losses were down 10% sequentially and 41% year over year at $346.0 million. As a percentage of period-end loans on an annualized basis, allowance for loan losses were 2.17%, down 17 bps from the prior quarter and 152 bps year over year.
Net charge-offs were down 38% sequentially and 40% year-over-year to $46.3 million. As a percentage of average loans and on an annualized basis, net charge-offs were 1.16%, down 68 bps sequentially and 77 bps year over year.
Non-performing assets were just up 1% sequentially but fell 36% year over year to $527.1 million. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets were 2.66%, up 9 bps sequentially but down 189 bps year over year.
Evaluation of Capital
First Horizon’s capital ratios declined in the reported quarter. Tier 1 capital ratio decreased 1 basis point sequentially and 4 bps year-over-year to 14.22%. Tangible common equity ratio fell 35 bps sequentially and 21 bps year-over-year to 8.70%. However, book value came in at $9.42 per share, up from $9.28 per share in the prior quarter and $8.90 in the year-ago quarter.
Capital Deployment Update
Concurrent with its first quarter earnings release, First Horizon has announced an increase in its share repurchase program. The company has increased its share buyback program to $200 million and extended through January 2013. The previous one was a $100 million share buyback program to be accomplished by end of August 2012. Notably, in the reported quarter, First Horizon bought back $44.5 million of common stock as part of that program.
First Horizon has also approved a quarterly cash dividend of 1 cent per share. The dividend is payable on July 1 to the common shareholders of record on June 15.
Our Take
First Horizon’s endeavor to lower its exposure to problem loans is impressive. The company is also aiming at controlling costs, strengthening capital levels, and improving long-term profitability by focusing on growing its core Tennessee banking franchise, and these augur well going forward. Moreover, share buybacks give a boost to investors’ confidence in the stock.
However, though the wind-down of the non-strategic part of the loan portfolio bode well, it will remain a drag on the company’s earnings going forward. A shrinking revenue base and regulatory issues, tepid economic recovery coupled with a low interest rate environment and mortgage exposure serves as headwinds for the company’s results.
Among First Horizon’s peers, both Regions Financial Corporation (RF) and Synovus Financial Corp. (SNV) will release their first-quarter 2012 earnings on April 24.
First Horizon retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we maintain long-term Neutral recommendation on the stock.
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