Despite posting a drop in revenues, First Horizon National (NYS: FHN) managed to beat consensus estimates in its second quarter. The Tennessee-based bank reported a strong jump in its earnings per share, helped mostly by an improvement in its credit quality. The bank also hinted that it may be looking to return excess capital to its shareholders.
A look at the numbers
Revenue for the quarter fell to $361.6 million from $426.0 million, down 15% from a year ago. Bad economic conditions resulted in a fall in demand for loans, which led to a drop in revenue, particularly in mortgage banking.
However, net income available to common shareholders stood at $42.6 million, an improvement over last year's $2.7 million, which was a result of an unusually high preferred stock dividend payment. During the second quarter last year, First Horizon paid out $14.9 million as dividend payment to the Treasury for TARP. The TARP payment resulted in lower net income.
The positive performance, despite the fall in revenue, was also due to the company's improving credit quality. First Horizon also gained from a fall in its loan-loss provisions, which fell to a negligible $1 million from $70 million a year ago.
A positive trend
Generally speaking, the banking scenario in the U.S. seems to be continually improving. This is evident from the fact that bigger regional banks such as PNC Financial (NYS: PNC) and US Bancorp (NYS: USB) recently raised their dividends. First Horizon, too, is apparently ready to follow suit thanks to strong levels of capital. At 14.5%, its Tier 1 capital ratio stands well above the minimum 8% requirement.
As fellow Fool Zeeshan Siddique mentioned in an earlier article, falling loan provisions are a powerful trend in the banking industry, helping American banks get back to full flow. Banks across America now believe that they will suffer fewer defaults on loans in the future.
Regional banks such as Flagstar Bancorp (NYS: FBC) and Hudson City Bancorp (NAS: HCBK) have been helped by lower market interest rates, which led to loan repayments, resulting in lower provisions for loan losses. Larger banks such as JPMorgan Chase (NYS: JPM) and Citigroup (NYS: C) have also performed strongly in their second quarters, helped by a drop in provisions for bad loans.
The Foolish bottom line
First Horizon performed well in a sector that's showing signs of improvement every day. It is looking to focus on boosting profitability and earnings in the long run as it expands In addition, the bank is looking at mergers to help fuel growth and to return value to shareholders through stock buybacks and an increase in dividends.
As the U.S. banking sector improves, these efforts should help the company grow and see improvements in its bottom line. First Horizon is a company to watch out for.
At the time thisarticle was published Shubh Datta doesn't own any shares in the companies mentioned in this article. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and PNC Financial Services Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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