First Horizon Corp (FHN) 2004 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the First Horizon National Corporation’s third quarter 2004 earnings conference call.

Today’s conference is being recorded.

In addition, you can listen along simultaneous simultaneously at www.shareholder.com/ftb/medialist.cfm.

Hosting the call for today from First Horizon National is Mr. Ken Glass, Chairman and Chief Executive Officer and Mr. Marty Mosby, Chief Financial Officer.

They are also joined by Mr. Mark Yates, Director of Investor Relations.

Before we begin, management has asked me to inform you that this conference call contains forward-looking statements involving significant risk risks and uncertainties.

A number of factors could cause actual results to differ materially from those in the forward-looking information.

Those factors are outlined in the recent earnings press release and in more detail in the most current 10-Q and 10-K.

First Horizon National Corporation disclaims any obligation to update any of the forward-looking statements that are made from time to time to reflect future events or developments.

At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following management’s comments.

Now it is my pleasure to turn the floor over to Mr. Glass.

Sir, you may begin.

Thank you, Operator, and good morning to all of you and thanks for joining our call.

As the Operator stated, I have Marty and Mark here with me.

We appreciate all of you taking an interest in First Horizon and we’re pleased to be on the call to talk to you today.

Last quarter we highlighted the new reporting segments that reflect our Company’s evolution from a regional bank to a national financial services company.

This quarter I want to reiterate that this reporting system should allow you to clearly see the growth and profitability within each segment.

Let me highlight our results in that context.

First, I will discuss the successful transition of our earnings composition and the associated benefits.

Then I will highlight the results of each of our segments and conclude with a strategy update.

Marty then will discus discuss the financial results in more detail.

Overall, our strategies are working and we’re seeing it in our earnings composition and growth.

The composition of this year’s pretax earnings has rebalanced significantly as retail commercial banking accounted for 61 percent of the third quarter versus 37 percent in last year’s comparable quarter.

From an annual perspective, retail commercial banking is expected to represent 60 percent of our pretax earnings in 2004.

That’s - that’s up from 34 percent in 2003.

This is relevant because our business mix allows us to produce industry- leading profitability levels despite the prevailing operating environment.

At the same time, the combination of our businesses has enabled us to leverage our competitive advantages and there provide us with growth opportunities.

As a result, today we report earnings consistent with our earnings from the same period a year ago, which as you will recall, was a very favorable business environment.

And unfortunate -- and And importantly, we continue to be among the highest performing financial services companies over the long run.

In addition, we have made progress in our expansion plans by encouraging our employees to cross- sell and leveraging our working together initiatives, which also has helped rebalance our revenue.

While earnings growth can tend to slow down during periods of transition and quarterly earnings may show some short-term volatility, long term, our performance will be among the leaders in the industry.

Before I discuss some highlights in each of the segments, I want to update you on the announcement we made a few weeks ago relating to an issue in our planned third quarter HELOC he-locks (ph) securitization.

We’re well on the way to resolving this issue and it should not hinder a fourth quarter securitization taking place.

Marty will get into the details on this a little later.

On the segments, we continue to show great progress in our national expansion.

This is most evident in the retail commercial banking segment.

Our expansion into middle Tennessee and northern Virginia is progressing as planned and we continue to evaluate other expansion opportunities.

In addition, we have made investments in our commercial banking business by expanding our commercial products and services to middle- market companies through the opening of offices in Winston Salem, in Charlotte, North Carolina, and Atlanta, Georgia.

Separately cross- selling is an important revenue driver for us.

We continue to see success in this strategy with our penetration of mortgage clients who add had more than one product increasing to 35 percent this quarter.

In the mortgage banking business, as expected, our originations revenue declined due to slow down in the refinancing activities and increased competitive pricing pressures.

However, we have partially offset these declines with the improved profitability of our servicing business and in the increase in our home purchase originations business.

Our sales force, which grew at double- digit pace, is continuing to focus its efforts more on the purchase business than the refinancing business with great success.

The current slow down we have seen in capital markets continues to be market related, and does not reflect the strategic progress we have accomplished over the last three years.

It is important to remember that the external economic environment gives us positives in some years and impacts us negatively in others.

Clearly, we are now in a challenging environment which is suppressing the demand for fixed- income securities, but we believe liquidity is strong and investors will reenter the market when their perception of upcoming rate hikes abate.

In 2001, we advanced three initiatives within capital markets -- – research, investment banking and portfolio management.

In spite of the current challenging environment, capital markets year- to- date, to September, 2004, revenues are still 28 percent higher than the same period in 2001 because of the success of these three initiatives.

FTN Financial is a great business for us, and we are continuing to invest in all aspects of their business where it makes sense for us to do so.

One common theme in all of our business lines is executing definitive long-term growth strategies built on customer acquisition and internal growth initiatives.

Additionally, by our three business segments working together, we will continue to focus on our opportunities to execute our national expansion strategy and improve profitability.

It’s our plan to remain one of the few leading financial services organizations to offer a comprehensive portfolio, financial products and services, in niche markets tailored to individual customer needs and distinguished by unparalleled customer service.

Before I turn it over to Marty, I want to highlight that the foundation of our culture is our commitment to our employees.

This culture encourages our employees to deliver excellent levels of customer service and overall performance.

It continues to help us to hire and retain the best people and as a result, this employee- focused approach translates into a better experience for our customers and in turn, benefits our shareholders.

In closing, I want to remind you that over the last five years, our strategy has produced an average EPS growth of 16 percent, return on equity of 22 percent and return on assets of 1.6 percent.

Now I will turn it over to Marty to go through the numbers.

Then , then we’ll come back and take your questions.

Marty.

Marlin L. Mosby, III:Marlin Mosby: Thanks, Ken.

Let me reiterate Ken’s greeting and thank all of you for joining us today.

Looking at the quarter -- – for the third quarter that ended September 30th, we reported earnings of $114 million or .89 cents diluted earnings per share, compared to earnings of $118 million or .91 cents diluted earnings per share for the third quarter of 2003.

As you’ve seen in the press release, we are able to maintain our profitability levels even in a very challenging environment.

Return on the average shareholder’s equity and return on the average assets were 23.7 percent and 1.63 percent respectively for the third quarter.

Before I detail the individual segments, I want to discuss the overall business composition and the drivers that frame our current environment.

Year- to- date, our earnings are $351 million, with $205 million from retail commercial banking, $95 million from mortgage banking, $45 million from capital markets and $6 million from corporate.

This composition is significantly different than our business in 2003, but as Ken noted, our EPS to date is consistent with last year-- - $2.73 for the first nine months this year versus $2.72 last year during the same period.

Last year’s pretax earnings included $438 million from mortgage banking in capital markets, which was 82 percent of our pretax earnings.

This year, mortgage banking in capital markets have produced $223 million, – approximately half of their pretax earnings last year, reducing our dependence on these two business segments to 29 percent and 14 percent respectively.

As we discussed over the last year, to offset the declines in mortgage earnings, we expected the retail commercial banking earnings to rebound as asset quality improved, discretionary spending was reduced, and investments in national cross- sell and expansion initiatives produced returns.

We have seen this scenario play out, as retail commercial banking pretax earnings have grown $133 million, or 84 percent, so far this year as the opportunities from our national expansion and asset quality trends continue to exceed our expectations.

Additionally, pretax earnings for the corporate segment have improved $68 million, as discretionary investment spending was reduced and balance sheet restructurings have created positive impacts on net interest income and security gains.

However, the transition has been challenged by two market- related events.

First, while we expected the demand for fixed- income securities to fluctuate in a rising rate environment, this year has been particularly challenging.

Secondly, interest rate volatility prolonged and deepened the expected pricing pressures in the mortgage market.

While these two issues have impacted our growth, we still expect to maintain stable earnings this year, maintaining our long term EPS growth of 15 percent over the last three years, – when the more favorable environments in 2002 and 03 are combined with this year’s outlook.

Moving onto specific drivers this quarter, we had several market conditions negatively and positively affect this quarter’s results.

First, the challenges -- as .

As we discussed, there were declines in fixed- income sales, compression .

Compression in earnings from lower origination margins and the delay of our normal quarterly securitizations of HELOCs he-locks into the fourth quarter.

At the same time however, there were three favorable developments that exceeded our expectations -- – national expansions, lower asset quality costs and security gains.

These results reflect the healthy business mix we have today, as we continue to see solid earnings and of profitability during a transitional quarter.

Now let’s take a quick look at each of the segment’s performances.

Let me note that as we did last quarter, we have furnished a financial supplement, which includes significant detail on each business segment.

The supplement is also available at our website at www.firsthorizon.com.

The press release, the supplement and our SEC filings include more detailed information, so I’ll only hit a couple of the high points from this quarter.

In our retail commercial banking segment, pretax earnings grew from $68 million to $104 million, as national expansion initiatives to First Horizon customers created further advances in cross- selling.

Asset , asset quality costs were reduced and efficiency improvements continued.

We increased penetration among our national customer base to 35 percent who have multiple financial services.

As a result, revenue from national retail commercial banking activities increased from 32 percent in the third quarter of last year to 39 percent in the third quarter of this year -- – [with] respect to our total retail commercial banking revenues.

As a result, pretax earnings this quarter from our national expansion initiatives doubled the last year’s third quarter profitability, adding $25 million in additional earnings to this quarter alone.

We saw loan growth of 22 percent, which reflects strength in our consumer and our single-family residential construction- lending units.

These products have been able to leverage our national footprints.

We are also benefiting from the improved market for commercial loan growth.

Deposit account balances grew 5 percent over last year’s levels.

However however, the divesture of Springdale Bank in the fourth quarter of last year is unfavorably impacting this growth rate.

A better representation of our third quarter deposit growth is a sequential quarter- over- quarter growth.

Compared to the second quarter this year, deposits grew on an annualized growth rate of 8 percent.

We continue to be focused on the implementation of strategies to grow our deposits, such as convenient hours, free checking, and targeted financial center expansions.

Separately, as we announced in late September, we discovered a technical error in the mortgage related he-loan documentation of our he-lockHELOC delivery channel, – one of the sources for loans that are securitized on a quarterly basis.

The cost of delaying the securitization this quarter should be approximately $8 million.

As Ken mentioned, we are resolving the issue and continue to expect to execute a securitization in the fourth quarter.

Going forward, retail commercial banking revenues should grow (indiscernible) double digit in the quarters ahead driven by national expansion, , further market penetration in Tennessee related to opportunities created by the disruption from recent industry consolidation, and return on investments made in additional full- service financial centers in middle Tennessee and northern Virginia.

Given current economic conditions, asset quality should remain stable at current levels and improvement in efficiency should provide further operating leverage.

One other factor you should keep in mind is that the fourth quarter securitization should be larger than usual since we had to delay the third quarter loan securitizations to the fourth quarter.

Moving onto the mortgage banking segment, pretax earnings decreased $64 million to $38 million dollars due to the expected drop in refinancing activities and competitive pricing pressures.

Mortgage origination volume fell 52 percent to $7 billion, as refinancing volume declined from 72 percent to total originations in the third quarter of 2003 to 31 percent this quarter.

However, in connection with the lower activity levels, operating expenses decreased.

In addition, servicing profitability improved due to the reduced impairment expense.

Additionally, pricing concessions increased late in the quarter, as competitive pressures in the market unfavorably impacted origination revenues by $8 million dollars.

Our margin on deliveries was 91 basis points this quarter versus 103 basis points a year ago.

In contrast to the reduction in refinancings, home purchase originations increased 18 percent as the sales force focused their efforts on home purchases and we continued to grow the sales force.

Another positive in the quarter is that the servicing macro heads performed as expected, with net servicing revenues improving from a loss of $26 million in 2003 to $26 million net revenue in 2004.

The mortgage servicing portfolio was $82 billion on September 30th, 2004, – a 21 percent increase from $68 billion on September 30th, 2003.

Additional Additionally, impairment costs decreased 34 million, triggered by the impact that rising rates had on mortgage prepayments in the servicing portfolio.

While impairment costs did improve as compared to last year, the recent decline in interest rates increased impairment costs to $13 million this quarter compared to zero last quarter.

As a result of improvements in processes and technology, productivity improved, resulting in a 24 percent reduction of servicing costs per loan.

Looking ahead, a continuation of recent trends in interest rates, origination volume from refinance of mortgages, and competitive pricing pressures could continue to negatively impact mortgage banking profitability.

Servicing profitability, however, should remain strong due to slow- downs in prepayments.

In The capital markets, pretax earnings declined from $34 million to $17 million primarily due to a challenging environment in of fixed- income markets.

Significant doubts and uncertainty within the investment community regarding interest rates and other economic factors has caused fixed- income investors to delay their purchases.

On a comparative basis, it is important to note that last year’s third quarter was favorably impacted by higher cash flows from the payments prepayments of mortgage backed products and agency costs.

Revenues from other sources decreased 16 percent from last year, – primarily due to the lower revenue in structured financed transactions.

Going forward, revenues from fixed- income security sales may remain subdued, as investors anticipate the impact that future Fed tightenings may have on bond yields.

As soon as investor’s investors’ expectations for future increases of long-term interest rates moderate, their demand should return to historical levels.

Finally, the corporate segment improved from a $24 million pretax loss last year to $11 million pretax gain this quarter.

Reduced discretionary spending helped lower expenses by $17 million to $11 million this quarter.

Third quarter of 2004, net security gains included $14.9 million of gains from sales of investment securities, as the investment portfolio size was reduced to balance an increase in loans held for sale, resulting from a delay in the closing of the securitization.

In the third quarter 2003, sales of lower- yielding securities in the investment portfolio resulted in net losses of $6 million.

Net gains from equity investments of $5 million were realized this third quarter, primarily due to the liquidation of a holding company investment.

This compares to net gains of $10 million last year, primarily resulting from the sale of venture capital investment.

Net interest income improved $3 million dollars since last year’s third quarter due to the balance sheet restructurings.

Before I close, I want to focus on asset quality for a second.

The ratio of allowance to loans has declined from 1.21 percent as of at September 30th, 2003, to 98.99 percent as of the end of September, 2004.

The primary driver of this decline was the improvement in the asset quality of both consumer and commercial loan portfolios.

This has been due to a favorable change in mix, as well as a continued economic recovery.

Since last year, 72 percent of our loan growth has been driven by high FICO HELOCs he-locks which have residential property as collateral.

While traditional commercial, auto and credit card lending all require over a hundred basis points of allowance coverage, he-lockHELOCs require less than 50 basis points.

As a result, this strong incremental growth and high quality, low charge- off loans has naturally reduced the need for allowance.

The increase in the ratio of allowance to net charge- offs from 2.88 percent at September 30th, 2003, to 4.71 percent at September 30th, 2004, is an indication of how significant this change in asset quality has been.

The level of allowance below losses has also been effected affected in both quarters by the movement of reserves for off balance sheet items to a separate liability account in a program to ensure high value he-lockHELOCs that eliminate the need for reserves on these loans.

Throughout this entire cycle, we have been consistently applying our loan loss allowance model and have continued to have provisioning in excess of net charge- offs.

Let me close by looking at what this quarter’s performance means to our outlook for this year and over the long term.

Even with the significant transition we have undergone, the current disruptions in the demand for fixed- income securities and the pricing pressures on mortgage originations, we believe that we will be able to maintain earnings per share for the full year consistent with what we reported for 2003 and profitability levels among industry leaders.

As our earnings mix has rebalanced towards more historic levels, with retail commercial banking representing approximately 60 percent of pretax earnings, and coupled with our national expansion initiatives, we expect to resume EPS growth in 2005.

Looking forward, while we may experience short-term volatility in our earnings stream, we believe over the long term, we will operate at a level consistent with our historic high performing growth.

Now let me turn it back over to Ken for some concluding remarks.

And thank you, Marty, but before we go onto on to questions, I’d like to summarize with a couple of comments.

First, our management team is extremely excited about the opportunity that lies before us.

We are successfully transitioning the business mix and at the same time, making progress on our strategies for growth and for our national expansion plan.

In sum, First Horizon is evolving rapidly into a true national company with strategies and business mix to compete effectively in those markets that we’ve targeted.

Now we’ll open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) And our first question is from Mr. David Honold of KBW.

Please go ahead, sir.

Good morning.

Good morning, David.

Could you give us the link quarter balances for he-locksHELOCs?

We sure can and let us look it up here and make sure we get it exactly right.

Could I ask my follow- up while you’re looking?

Sure.

If you work under the assumption that the Fed is on a measured tightening campaign, can you just comment on what that means for the ‘05 outlook – for the fixed- income capital--?

Marlin L. Mosby, III:Marlin Mosby: Okay.

First let me -- – the he-lockHELOC number, David, is embedded in our real estate residential line item on the balance sheet.

There’s only about $.5 million -- $.5 billion in mortgages in that line account.

And what I’m grouping together, once you take out that $.5 billion, is going to be your he-lockHELOCs and your fixed rate second mortgage liens.

So if you put those two together, and just back out the $.5 billion from the $7.3 in the second quarter and $7.9 -- – $7.85 in the fourth quarter, that would give you the incremental growth.

So there was about $600 million worth of incremental growth in he-lockHELOCs from the second quarter to the third quarter.

David, relative to your second part of your question concerning what with the expected Fed measured increases in rates next year, – what is our expectation in the fixed income area?.

That’s hard to predict, but we’re at a pretty low level of activity today.

There’s definitely liquidity in the market and we expect, as the outlook gets more certain, as opposed to the way it’s bouncing around today, that they’ll return to growth.

Thank you.

Thank you.

And our next question is Mr. Kevin Reynolds (ph) of Stafford Financial.

Please go ahead.

Good morning, gentlemen.

Hey, Hi Kevin.

A couple of questions for you.

One is – one’s a follow up on the fixed- income business and I just sort of want to go back to something that, Marty, – we talked about, I guess, probably three years ago before it really started to ramp up.

As I recall at the tim time, what we were learning or to educate ourselves about was that the fixed- income business, at least in the depository side, was more a function of the liquidity in the banking sector, i.e., deposit inflows were strong and expected to remain strong, and there it was no non-mortgage loan demand to deploy to that liquidity into.

If we’re at a point where deposit growth is slowing, and could be slowing for quite some time industry wide, and loan demand outside the mortgage arena picks up at all going forward, does that not change the environment from which -- for fixed income from one that’s impacted primarily by short- term interest rate expectation and more to sort of a permanent or an intermediate impairment of the activity levels, given the mechanics of the banking industry as a whole?.

And then I’ve got a second question as well.

Marlin L. Mosby, III:Marlin Mosby: Okay.

If you look at that mix, – that is something that we definitely look at and calculate on, – kind of predicting or expecting what’s going to happen.

Loan growth and deposit growth, as we’ve come into this year, really hasn’t been the driver. – We we started to see some pick up in loan growth in the market, but we’re not seeing enough and deposit growth really is still relatively strong.

So liquidity in the banking sectors today is not what’s driving it.

It’s really driven by -- and what we’re seeing, both in the non- depository and the depository side, is a delay in their purchase due to the perception of where those longer- term rates are going.

It’s not so much what the Fed’s going to do as much as that drives a perception.

As happened in this quarter, is a decline in interest rates, caught everybody by surprise and really kind of put them into a paralysis to kind of think, “Now now what does that mean and in light of the Fed anticipated rate rises?”.

So what we’re looking at today, Kevin, is not related to what you’re saying is that fundamental long term --– when that happens, yes, that will definitely -- and will have an impact, but it’s not what’s driving it today, and it won’t be nearly as significant as the market disruption that we’re seeing right now that’s impacting both the non-depository and our depository customers.

Okay, fair enough.

My second question deals more, I guess, with semantics.

Ken, I think you said that Q3 EPS was consistent with last year’s level, and as I look at in the press release, it’s 89 versus 91, so a modest decline, and then I look in the language of the press release, – it says four full-year earnings should be consistent with 2003.

Should I read into that that maybe 2004’s earnings should be now expected to be below the level reported for 2003?

Well, if you’re talking about a penny or two, Kevin, with this environment, we’re not able to predict earnings within a penny or two for a quarter or for a year, so we’re talking in the range of.

And, yes, pennies can -- – we can be pennies either side of that.

We could be pennies above it; – we could be pennies below it.

Okay.

Fair enough.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And our next question is Mr. Ariel Rozowski (sp ph) of Elmer’s Capital Management.

Please go ahead.

Okay.

Can you hear me?

Hello.

Yes.

Can you hear me?

Sure can.

Marlin L. Mosby III Marlin Mosby: Hello, Ariel.

Hello.

Yes.

We can hear you.

I’m sorry about that, guys.

That’s okay.

Technical – technical problems here.

Two very quick questions.

The first is a really technical question.

I can’t find your supplement.

Is it on your website already?

I think it should be.

If not, we will make sure that we get it emailed to you very quickly.

Marlin L. Mosby III Marlin Mosby: Yeah, it should be on the website if it’s not –

It’s also a filed document so it’s-- – it would also be --

Okay, we’ll well, I’ll go find that.

The second question was just you mentioned that a he-lockHELOC sale would be bigger than -- – you just warned us it would be bigger than we might expect in the fourth quarter.

Can you give us a range of how big it will be?

Well, what we are indicating is it will be bigger than the normal range that you’ve seen in the earlier quarters because we will be doing the third quarter plus some.

What was the normal range earlier?

Well, the amount that we disclosed that we were expecting in the third quarter was about $7 million.

Okay.

And then previous quarters you had what, – something around $5 million?

That’s correct.

So I should just add the two and call it 12 million?

No.

It will not be double – the third quarter.

The third quarter was a little larger than the normal quarter.

Okay.

So you can’t just double it.

Okay.

So so less than 12 million, – great greater than 7.

That’s correct.

Okay.

Thanks a lot guys.

That’s all I got.

And you know, the pricing of those deals make a difference in how much gain you get, so it’s not just the volume.

It’s it’s the pricing of the volume.

Just a follow- up --– are you implying pricing is less favorable than it has been?

No, no.

No.

It all depends on the product mix that you have and what else is in the market available for the buyers at that point and in time.

We have a lot of issuers of these securitizations and you may have a few billion dollars out at the market the same time you take yours out, and that will effect affect the pricing.

Does that -- – can you give us an EPS range of what you think the he-lockHELOC will contribute in the fourth quarter?

No, we cannot.

Okay.

All right.

Thanks a lot, guys.

Thank you.

And our next question is Ms. Heather Wills (sp ph) of Merrill Lynch.

Please go ahead.

Hi.

Good morning.

Good morning.

A couple of questions on your mortgage business.

First, can you give us some color on what happened to delivery margins and what you expect going forward?

Sure.

As Marty, you stated in your numbers that the margins, I think, 91 basis points down from 103 in the same period last year.

We were also at 104 for the second quarter, so we dropped the margin on the deliveries from 104 to 91, or 13 basis points, and that was driven by the competitive pricing pressures that we’re all experiencing in the market place.

We’ve worked hard and done a great job, I think, of maintaining our margins more so than going after the market share.

And the pressure has to continued to be in the market- place and it’s gotten deeper than we would have anticipated for a longer period of time.

Can you contemplate on what a floor might be for these?

No.

Today we’re seeing about the same level of margins that we ended up with last quarter.

So it all depends on what the major competitors in the business want to do to gain market share.

We’re producing better margins than they are based on their disclosure, but it’s obviously hurting our buying.

But we believe the profitable business is what we need to focus on.

What gives us an advantage there is we allow our mortgage originators to sell other products and we pay them commissions on those other products.

And that’s why we’ve penetrated our customer base by 35 percent with other products and that keeps income flowing to those individuals and keeps them very competitive in the market place.

Okay.

And just a question on mortgage expenses.

They’re coming down, but not as quickly as the revenue line.

Can you give us any color on what to expect there going forward?

Well, the margin has a lot to do with that.

As your margin decreases from the pricing side, and obviously on the servicing side, if you don’t split those apart -- – we’re growing our servicing portfolio, and so you’re servicing cost and total will increase.

However, however our servicing cost per loan is showing substantial improvement.

Marlin L. Mosby III Marlin Mosby: One thing we would also add to that is that if you look at the expenses, they’re related directly to the origination, commissions and incentives.

Those expenses are up in net revenues.

So the revenue number that you’re seeing includes a lot of the direct costs related to the volume that’s produced through the origination channel.

So while the number that you see in the segment for expenses is declining, but not as rapidly as what you’d think given what’s going on in origination volume, – that’s only because the revenues that you’re seeing are already incorporate the decline in those expenses.

And something that we’re continuing to do even in a more difficult market is expanding that sales force.

Those are a commissioned sales force, but obviously there is some support structure that’s necessary and we will invest in that support structure to support that sales force.

Okay, great.

Thanks very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And we’ll take our next question from Ms. Jackie Reeves at Ryan Beck.

Please go ahead.

Thank you.

I apologize if you already answered this question, but on the improvement on the servicing side, you were kind of going there, but I don’t know if you actually gave the numbers with respect to the loan serviced, maybe per FTE or the amount per loan.

You talked about the profitability improving, but did you give some definite parameters on how that has improved?

J. Kenneth Glass Marlin Mosby: Let me see.

Mortgage, – we had the disclosure. – The the main disclosure we give is on the cost per loan, – direct cost per loan, and a year ago, that was $75, – a little over $75.

It has decreased to less than $57 and has steadily gone down.

Do we have the loans per person here?

That has --– I can tell you, – I don’t have the number in front of me, Jackie. – We’ll we’ll be glad to get it, but that has significantly increased.

As a matter of fact, even as our servicing portfolio has grown, we’ve been able to lay off people month by month in the servicing, as our efficiencies have improved and continue to improve in that area.

Jackie Reeves.

Okay.

And then overall on the efficiency, – obviously it’s hard to predict as some of the questions were getting to what happens to fixed- income volumes, – the tenure tenor of the market into next year, given the moderate increases in rates.

With all that being very challenging, are there – is there another way to attack this in terms of how are you addressing maybe the overall efficiency? – are Are you taking a look at if there are under- performers in those businesses and making some adjustments along the way, – are you just looking for the volume to come back to normal?

No.

No doubt, we’re continuing to look at efficiencies and if you look at the margin in our capital markets area, it’s a very healthy margin relative to the people in that business, and their margins range from the low 30s 30’s to the mid 20s, 20’s and that business, particularly the fixed- income business, is drive driven totally by a variable cost.

And so if you’ll see that that margin has not been impacted that greatly, even with the drop in fixed income.

The thing that we’re also doing to address that, that I’ve mentioned, is that those other three business lines have healthy growth in them and they are continuing to grow.

In – in the capital markets area – I’m referring to, Jackie.

Okay.

Thank you.

Thank you.

And our next question is Mr. Jason Goldberg of Lehman Brothers.

Please go ahead.

Thank you.

I guess it looks like there was about, - I guess, 17 million in hedge gains and only in 13 million in impairment, and I guess you got a net benefit of about 4 million.

Is that the right way to look at it?

And and then as rates rise, that you expect that relationship to hold or to not hedge as much?

Marlin L. Mosby, III:Marlin Mosby: Actually, one of the things, Jason, we’ve talked about is that the hedge gains that you’re referring to there include about $17 million of NII, – which is a carry on those swaps that we have in the hedge book, and that is not really hedge gains as much as it’s just a constant earnings stream that we have at today’s level of rates.

So, that doesn’t change, and you see it’s been fairly consistent over time.

So that is a positive number that you would need to back out of that relationship you just talked about.

So if you look in general then, most of the hedge gains that you’re talking about are related to that impact this quarter.

Okay.

Marlin L. Mosby, III:Marlin Mosby: It’s not related to just a pure hedge gain.

So when you start looking at impairment, you had a negative impairment number that kind of came in as this rate drop occurred, and is one of the things that’s been talked a lot about in the market- place over the last couple of days.

Okay.

I guess with that being said, it looks like you’re carrying your MSR at 1.5 percent fairly -- – 150 basis points, – kind of in line with last quarter and we’ve seen a lot of others in the market- place – that mentor (ph) match or come down.

I think Wells’ went was from 137 to 118.

So I guess two questions -- – one, why is yours more stable, and then secondly, is your servicing mix much different from your peers that would allow you to carry it at a higher level?

Jason, we do a third- party review of our servicing values every quarter and we’re in the mid to low range of all peer analysis of servicing based on product mix.

So we’re very comfortable that that 150 carry is very much in line with the position that we continue to run below the medium of that industry mark, by .

By product, – which means that 150 151 is a weighted average based on mix.

Okay.

And and then I guess lastly, in the release, I guess, or in you your comments, you mentioned you know you expect earnings to grow in 2005.

I guess, is that a couple of pennies above the expected 362-’ish number this year, or is it back to the 15 percent growth we’ve come to expect or somewhere in the middle, or any thoughts on narrowing that range?

Well, with the low level of -- – well, let me start off differently then.

With the change in our business mix composition, now with the retail commercial bank being 60- something percent, capital markets being in the mid- teens and mortgage being 28 (ph) plus, we’ve returned back to our historical business mix that’s allowed us to grow.

Marty pointed out the growth that we’ve gotten off the national retail commercial banking growth providing quite a bit of income on a quarterly basis.

So you couple our repositioning of that mix with our growth opportunity in the national markets, we anticipate that we’ll resume closer to the historical growth rate that we’ve -- long- term growth rate that we’ve had.

The uncertainty and how long the mortgage pricing will be there, and the unfavorable market for fixed income is a question mark for us, - particularly early in the year.

Let me -- – in saying that, – let me say though that we view both the fixed- income business and the mortgage business as a key to our long- term success, – historically and future, and we’ll continue to invest in those and grow the support functions for them.

Great.

Thank you.

Thank you.

Our last question is Mr. John Balkind of Fox-Pitt.

Please go ahead.

Hi, guys.

My question has actually been answered.

Thanks.

Thank you, John.

Thank you.

Operator, did I hear you say that was the last question?

That is correct.

Okay.

Well, then I want to close by again thanking everyone for your interest in First Horizon and have a great day.

Thanks a lot.

Thank you.

Ladies and gentlemen, this now concludes today’s teleconference.

Thank you for your participation.

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