Wednesday, July 16, 2008

'World of Hurt' Not Over at First Horizon National

Shares in First Horizon National Corp (FHN-$5.85), the largest bank in Tennessee, rebounded almost 17 percent, or 85 cents a share, after the regional bank said today its full-year 2008 charge-off outlook remains within a previously communicated range of $385 million to $485 million.

Investors also cheered the news that current CFO, D. Bryan Jordan,
will succeed caretaker CEO Jerry Baker, 65.

The 10Q Detective opines, however, that far from receiving credit, Jordan is part and parcel of helping create existing credit issues in the company’s portfolio.

What? How can you make such a blanket statement? Jordan, 45, just arrived on the scene one year-ago.

Jordan resigned as the chief financial officer of Regions Financial Corp (RF-$7.00), the largest bank in Alabama, one-year after the Birmingham-based bank merged with cross-town rival AmSouth. Might he have left Regions after receipt of signals that he would be denied the slam-dunk to the corner CEO office? One can only speculate.

Nonetheless, a dusting of old fingerprints would find his thumbprint still fresh on a similar credit mess at Regions, which is struggling under the weight of its own bad loans.

Jordan and his management team will be executing from a playbook already drawn by Baker, with business repositioned on regional banking and capital markets.

Capital Markets Growth Fallacy

Albeit First Horizon is divesting its mortgage segment, we do not understand how volatility will be reduced—or shareholder returns rebound—by building out a full-service broker-dealer platform, especially during a bear market in stocks and bonds (with an impending implosion in many commodities, too).

The investment community is like sheep, following the flock as one. Lauding improved capital ratios—resulting from common stock issuance and balance sheet reductions—not one analyst has voiced concern that First Horizon’s Fixed Income growth could hit some bumps in the wake of the Federal Reserve reversing its monetary policies.

Executive Severance

Jerry Baker will have a more comfortable retirement than the 20 percent of employees pink-slipped at First Horizon in 2007; the present value of his pension and deferred compensation are worth $1.19 million and $1.69 million, respectively.

The 10Q Detective acknowledges, however, that for a rich dude, Baker will feel some pain. The aforementioned retirement plans were calculated on a closing date of December 31, 2007, when First Horizon’s common stock was $17.94 a share.

He is also sitting on 162,500 stock options (granted with an exercise price of $39.66 a share) when promoted to CEO in January 2007—now worthless.

What's it worth? if I die.
What's the reason? they all cry.
I have no feelings, too much the same,
Not my problem, I feel no blame.

First Horizon provided Jordan with a hiring bonus to replace equity compensation forfeited as a result of leaving his former employer (261, 250 shares of Region’s common stock granted at a strike price of $39.43 a share).

Paints my world of hurt.
Paints my world, in my world of!
In my world of hurt!!!
~ thrash rock group Urge Overkill,
"World of Hurt" YouTube video

His 2007 hiring bonus was paid in a combination of cash and equity. The cash portion of the bonus was $100,000, and the equity portion was deemed to have a total value of approximately $2.4 million—like the forfeited Region common stock, now deep out-of-the money. In hindsight, he should have asked for more upfront cash!

Jordan is feeling another world of hurt, having opted to receive part of his guaranteed 2007 bonus in the form of 50,000 stock options (having a 7-year term), priced at $25 per share.

Far from being a pointless exercise, we included Jordan’s stock information to remind readers that if there is one time that an executive’s interests were aligned with shareholders, this is it!

Other Investment Considerations

The ratio of allowance to total loans increased to 2.59 percent from 2.20 percent in the prior quarter. Management’s optimism aside, we believe the company is still under-reserved and its allowance for future charge-offs does not accurately address portfolio stress from declining economic conditions, especially given exposure to both commercial and residential construction and home equity loans.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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