It wasn't pretty, but First Horizon National Corp. returned to profitability after eight consecutive quarters of losses.
Behind its $2.7 million, penny-a-share profit were a few one-time accounting gains. But the Memphis company's headway in battling its credit troubles allowed it to lower its provisioning for loan losses and reduce noninterest expense.
"We're certainly not declaring victory," Chief Financial Officer William Losch 3rd said Friday on a conference call with analysts. "But with that said, we're pleased with the second quarter's progress."
Nonperforming assets dropped from 5.6% in the first quarter to 4.9% in the second, with the biggest reductions coming as the bank wound down its construction loan portfolio. Chargeoffs fell by more $50 million, to $133 million, and provisioning fell by a third, to $70 million. Delinquencies in mortgages improved, which the company attributed to the smaller portfolio's seasoning. The only portfolio whose reserves did not decline was commercial real estate, which remained flat.
Previously after releasing quarterly results, First Horizon regularly promised investors that it could bring credit costs down at a sustainable pace. Given the uneven nature of the economic recovery, analysts saw the second-quarter results as evidence that management had a handle on its broader portfolio. "We expect a better-than-peers rate of credit quality improvements in the rest of 2010, as legacy lending winds down," Standard & Poor's analyst Erik Oja wrote in a research note Friday.
The company's net interest margin held steady at 3.2%, and revenue rose slightly quarter over quarter, though it was down 11% year over year.
Not all the news was good. Though the company benefited from a $44 million mortgage hedging gain for the quarter, revenue from mortgage fees dropped and mortgage repurchase costs rose to $56 million, after declining in the first quarter. "This is obviously still an issue for us and the industry, but we ceased originations in August of 2008. So there's going to be a finite point at which volumes start to slow," Jordan said. He said he considers the bank "well reserved" for repurchase requests.
Exposure to other banks, particularly to trust-preferred securities, also remained a sore spot. Despite avoiding any chargeoffs in the company's $465 million trust-preferreds portfolio, "we do not expect this trend to continue," Chief Credit Officer Greg Jardine said.
But after a difficult two years, its management predicted the company was about done shrinking its balance sheet. Jordan said the rapid contraction of First Horizon's balance sheet should be behind it. Construction loans have dropped from $4 billion to $250 million, and the home equity portfolio has stabilized, he said. "I think … we'll see our balance sheet bottoming somewhere in the $26, $25 billion range."