Six weeks after First Horizon National Corp. called off an unprofitable retail bank expansion, its chief executive said the company remains committed to its mortgage and capital markets units and is determined to remain independent.
Gerald L. Baker, the $38.4 billion-asset Memphis company's president and CEO, said it is on target to reduce expenses by $175 million by the first quarter, in part by "right-sizing" its mortgage and capital markets business. In a wide-ranging interview last week, Mr. Baker sounded optimistic about business trends in both the mortgage and capital markets operations, where interest rates and liquidity concerns have taken a toll, but he said that more cost cuts could be coming.
"We are still looking at other things that we might do differently," he said, though he would not provide specifics. "We want a company that's not just good at raising revenue, but one that is also productive."
Mr. Baker was adamant about one thing. "We're not interested in selling," he said. "We have to avoid being consumed by the irrationality of the moment … and we're not going to use this market as an excuse. We have to make sure that we're performing better than others while putting ourselves in a better long-term position."
Performance, however, has not been a hallmark of First Horizon in recent quarters. Its second-quarter earnings sank 79% from a year earlier, to $22.2 million, as it incurred $39.3 million of restructuring charges tied to its cost-cutting efforts.
For the quarter, the mortgage unit posted a $7.6 million loss, compared with a $19.3 million gain a year earlier. The capital markets unit fared somewhat better. It posted an $8 million profit, versus a $9.9 million profit a year earlier.
When it announced its results in July, First Horizon also said it would jettison a plan to expand its retail bank nationally by piggybacking on its mortgage business. The company plans to sell 34 branches in markets such as Atlanta, Baltimore, Dallas, and northern Virginia after they lost $10 million in the second quarter. It will now focus most of its retail banking effort in Tennessee.
Through Tuesday, First Horizon's stock has dropped 27% this year, although it has recovered some since hitting a 52-week low Aug. 15.
"They've done an about face. Getting out of the national markets must be a precursor to getting out of the mortgage business, if not an outright sale," said Anthony Davis, an analyst at Stifel, Nicolaus & Co. Inc. "It could be a while" before the company regains momentum. "I don't see it anytime soon."
However, Mr. Baker, who once ran First Horizon's mortgage business, said his company's mortgage volumes, though clearly down from the housing boom, appears to be stabilizing and "seems to be holding up pretty well."
The company is poised to gain share as more mortgage brokers buckle, he said. "A lot of capacity has certainly left and continues to leave."
Mr. Baker said First Horizon began increasing its pricing and raising standards in its mortgage operations more than a year ago, and it stopped originating nonprime loans in the first quarter. As a result, he said, about 90% of its originations are now 30-year conforming products that can be sold to Fannie Mae and Freddie Mac.
"I believe we can still sell the remaining 10%," he said. "They have been marked in the pipeline for what we believe is the current market. While we are wondering if there are buyers for certain types of mortgages … I believe that there's a limited market for good quality loans that fall into that triple-A-rated security."
Richard Bove, an analyst at Punk, Ziegel & Co., upgraded First Horizon's stock last week to "market perform," from "sell," because potential legislation to increase the portfolio limits for Fannie Mae and Freddie Mac could create "a dramatic turn" in First Horizon's fortunes by spurring originations and improving the secondary market.
Mr. Baker, however, said it could take several quarters before investor confidence recovers, regardless of what Congress and the Bush administration do.
"We'll see in coming weeks how things settle out, but confidence needs to be restored," he said.
Meanwhile, First Horizon's capital markets business, which had felt pressure in areas such as fixed income, has shown signs of improvement, with average daily volume rising throughout the year, he said. "There is a lot of volatility. That business, however, is a lot more stable that many may recognize."
He downplayed the company's move to open capital markets offices in Asia. Last quarter First Horizon opened an office in Hong Kong, and it plans to open one in Tokyo early next year.
"It would be a huge overstatement to call this an international move," Mr. Baker said. "Some of our customers said that they would do more business with us if we had a local representative. For us the risk is no different … and we not expanding on the products we're already offering."
Providing an update on the branch sales, Mr. Baker said that several interested buyers are conducting due diligence on the operations, which he believes can be sold this year. First Horizon is likely to sell the branches in a number of packages that will include loans, deposits, and facilities, he said, and those sales would allow First Horizon to eliminate an additional 350 jobs without layoffs. To date it has cut about 850 jobs this year, or 7% of its work force.
