First Horizon National Corp.'s chief executive and president continued his remake of the Memphis company Wednesday by delivering on a promise to downsize its mortgage operations to weather a turbulent operating environment.
Gerald L. Baker announced cutbacks that would eliminate half of the mortgage division's sales force and shutter 14% of its offices this year.
Last month the Mortgage Bankers Association said it projects a 25% slide in industrywide originations through the end of next year. Mr. Baker, who once ran First Horizon's mortgage business, said the cuts are necessary because originations could decline further than the MBA has predicted. "We think it's important to get in front" of that decline, "because we think it might be greater than that."
Since taking the helm at the $38.4 billion-asset First Horizon in January, Mr. Baker has curbed a broad expansion engineered by his predecessor, J. Kenneth Glass, by reining in an effort to expand its retail bank beyond Tennessee by converting mortgage offices in major cities.
In an interview last month with American Banker, Mr. Baker had said that he was continuing his review of First Horizon's business, and that he was looking at making changes in mortgages and in capital markets. In a presentation Wednesday at the Lehman Brothers Financial Services Conference in New York, he said there are "no major initiatives" planned in the capital markets division.
First Horizon will cut 1,500 retail and wholesale mortgage sales positions and will close about 50 offices. Mr. Baker also said at the conference that his company also is looking at its construction and consumer lending operations, but for now the mortgage business will bear the brunt of the latest round of cutbacks.
The cuts would focus on the least-productive employees, he said. "The top 50% produce about 75% of the business."
The mortgage business, which lost $16 million in the second quarter, could lose up to $40 million to $50 million more than that this quarter, largely because of wider spreads in the secondary market, he said.
In the Aug. 30 interview, Mr. Baker was adamant that First Horizon would remain independent. "We're not interested in selling," he said. "We have to avoid being consumed by the irrationality of the moment … and make sure that we're performing better than others while putting ourselves in a better long-term position."
On Wednesday he did not address the matter of independence. However, his comments seemed to reflect a desire to remain in charge. He said that First Horizon wants to shrink its $106 billion mortgage servicing portfolio over the next 12 to 24 months, with an optimal size of about $64 billion.
"There might be a time … to start selling servicing in bulk," he said. "I don't think that will happen anytime soon, but things should change in the next year … and there will eventually be some appetite."
Mr. Baker also said he plans more changes in strategy. First Horizon is planning to shrink its $22 billion loan portfolio by about $2 billion over the next 12 months, and it will stop offering deposit products at its mortgage offices "within the next few weeks," to focus instead on Internet-based sales. It also plans to shut down its national small-business platform.
Such efforts would further its retreat from numerous noncore businesses, including last year's sale of its merchant processing business to U.S. Bancorp, its first-quarter exit from subprime mortgages, and the shutdown of its collectible coin-merchandising business.
More moves could be made, Mr. Baker said. "We'll continue to look at our individual businesses to see whether they add value."
James Schutz, an analyst at Sterne, Agee & Leach Inc., said in an interview that the mortgage cutbacks make sense and show that Mr. Baker has moved beyond basic cost-cutting.
"It's fairly obvious that he is realigning the mortgage bank to make a simpler yet more productive business," Mr. Schutz said. "The servicing portfolio had created a rather complicated hedging challenge … and demand for construction loans in a lot of markets is absolutely dead in the water."
Kevin Reynolds, an analyst at Janney Montgomery Scott LLC, said in an interview that the other moves also appear logical. "They should never have gotten into branch banking across the nation. It was a poor use of capital. Shrinking the balance sheet should help them improve their capital levels."
Mr. Baker said the cuts announced Wednesday, when added to initiatives dating back to last year, mean that First Horizon eventually will cut about a fifth of its work force. It stood at 12,000 last month, according to its Aug. 7 quarterly filing with the Securities and Exchange Commission.
The company has cut most of the 850 posts it targeted as part of its effort to eliminate $175 million, or 10%, of its overall annual expenses by next year. Another 320 jobs will be cut when it sells 34 unprofitable branches in Atlanta, Dallas, Baltimore, and northern Virginia. (Mr. Baker said he expects to have agreements to sell those branches by mid-October.)
Analysts said whether the deeper cuts will support the management team's intention to remain independent remains to be seen.
Mr. Schutz said Mr. Baker should have another 12 to 24 months to see if his moves turn First Horizon around. "If that doesn't happen, they won't have any other choice other then to sell the bank," he said. But Mr. Reynolds seemed more optimistic. "I think they finally have a plan in place to weather the storm and achieve success on the other side," he said. "There's no doubt that it is a difficult environment … but this company has got to right the ship. There has also been more talk lately, compared to six months ago, that they could be for sale, and I'm not going to discount that."
D. Bryan Jordan, First Horizon's chief financial officer, said during the conference that the mortgage cutbacks likely would save the company an extra $35 million to $45 million next year, though there would be some revenue loss tied to the reductions.
On credit quality, Mr. Jordan said that nonperforming assets should increase over the rest of the year. He does not expect the net chargeoff ratio to exceed 0.45%, but First Horizon is likely to "over-reserve" in the coming quarters.
He also discussed a plan to boost First Tennessee Bank's deposit share in its home state to 30%. It was 20.7% in June of last year, according to data the Federal Deposit Insurance Corp. released last fall. He gave no time frame for that growth, though he said First Horizon plans to build 30 branches in the state over the next year.
