First Horizon National Corp.'s next chief executive said he expects to inherit a stronger, albeit smaller company that could earn nearly $500 million a year excluding the provision expenses that contributed heavily to a $19 million net loss in the second quarter.
In addition to announcing its second-quarter earnings late Monday, the Memphis company said D. Bryan Jordan would succeed Gerald L. Baker as president and CEO on Sept. 1. During a conference call Tuesday morning, Mr. Jordan said he would continue to emphasize cost cutting at the $35.5 billion-asset First Horizon, which is selling its national mortgage business to MetLife Inc. What would remain is a Tennessee retail bank and a capital markets business.
Mr. Jordan joined First Horizon as its chief financial officer in April 2007 from Regions Financial Corp., where he held the same position. When he was hired, many on Wall Street speculated that he was being groomed to succeed Mr. Baker. Mr. Baker, 65, will stay on as a vice chairman until the end of the year.
Mr. Jordan, 46, said on the conference call that First Horizon has "a well-thought-out, viable business strategy in place. We have made good headway in implementing needed changes and strengthening our position."
Those changes have come with a cost. First Horizon reported a second-quarter loss of $19 million, or 11 cents a share, compared with earnings of $7.9 million in the first quarter and $22.1 million a year earlier. The average analyst estimate called for a net loss of 8 cents a share, according to Thomson Reuters. First Horizon, which moved its reporting date up two days, also reported losses in three of its previous four quarters, during which it tried to restructure its operations.
Mr. Jordan has some work to do to reach his target of annual profits of $500 million. Last year First Horizon lost $170.1 million, recording a net loss of $248.6 million in the fourth quarter tied mostly to a restructuring of its national mortgage business. However, in an interview Tuesday afternoon, Mr. Jordan said he feels good about First Horizon's capabilities. "We feel very good about the core underlying earnings power" which are "being masked by credit issues," he said. "Our customer trends tend to be very good."
In the second quarter worsening credit quality was the culprit. First Horizon recorded a $220 million loan-loss provision, with nearly half of that tied to residual assets from its national lending businesses shuttered in prior quarters. The provision fell 8.3% from the first quarter but was five times higher than a year earlier. Net chargeoffs were $127.7 million, up 28.9% from the first quarter and nearly six times higher than a year earlier. First Horizon said home equity losses could be $20 million above its initial expectations, though delinquencies seemed to peak in February. It also said losses are rising in commercial and industrial lending and commercial real estate loans made to investors; it is projecting higher chargeoffs over the rest of the year as it attempts to resolve those situations.
Analysts said they were generally pleased with First Horizon's efforts to date, including its decision to jettison the national specialty lending businesses, which caused much of its exposure to home equity and small-business lending and home builders. Capital markets earned $24.1 million in the second quarter. Though First Horizon's retail bank lost $26.7 million, the results included an $89 million provision. The net interest margin expanded 20 basis points from the first quarter and 22 basis points from a year earlier, to 3.01%.
Anthony Davis, an analyst at Stifel, Nicolaus & Co., said he was encouraged by the margin expansion and a "capital profile that looks better" after First Horizon raised $690 million in the second quarter and replaced its cash dividend with a stock payout. "You have to be pretty impressed with the progress they're making," he said. "The pace by which they get to some semblance of normalcy comes down to things that are out of their control."
Adam Barkstrom, an analyst at Sterne, Agee & Leach Inc., said, "It looks like for the most part these guys have laid out a pretty clear strategy and are getting past the hurdles they needed to clear." While he would not completely rule out the need for more capital given the credit problems, he said First Horizon did the right thing by raising capital before it would have been more difficult to do so.
It was unclear whether Mr. Baker's departure was tied to First Horizon's recent performance. A company spokesman said Tuesday that CEO succession planning began in April and was approved by the board at its regularly scheduled meeting Monday. Mr. Baker replaced J. Kenneth Glass as CEO in a January 2007 management shake-up, though he was close to First Horizon's mandatory retirement age. He said a number of times last year that he wanted to stay longer, and in April 2007 the board waived the provision in First Horizon's bylaws that would have required him to step aside. Over the past 15 months Mr. Baker has overseen moves that included exiting national lending businesse. However, analysts said Mr. Jordan likely had an influential role in those decisions and took an aggressive stance on credit-quality deterioration.
On Tuesday the market reacted favorably to the news, sending First Horizon's shares up 17%.
