First Horizon Corp (FHN) 2006 Q4 法說會逐字稿

Welcome to this FIrst Horizon National Corporation's fourth quarter earnings conference call.

Today's call is being recorded.

In addition you can listen simultaneously at www.shareholder.com/FHNC at the presentation link.

Hosting the call today from First Horizon National Corporation is Ken Glass, Chairman and Chief Executive Officer;

Marty Mosby, Chief Financial Officer; they are also joined by Jerry Baker, Chief Operating Officer; and Dave Miller, the Director of Investor Relations for First Horizon. [OPERATOR INSTRUCTIONS] Mr. Miller, you may begin.

Thank you, operator.

Before we begin we need to inform you that this conference call contains forward-looking statements involving significant risks and uncertainties.

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

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

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

Also, please remember that this audio webcast on our website at www.fhnc.com is the only authorized record of this call.

Now I would like to turn it over to our Chairman and CEO, Ken Glass.

Thank you, Dave.

And I want to wish everyone on the call good morning and also welcome you to this call.

This quarter we reported earnings of $76 million or $0.60 per share.

These results are generally in line with expectations given that the yield curve further inverted by an average of 26 basis points from the third quarter.

At the same time this quarter's results reflect the successful execution of key initiatives we shared with you last quarter.

Let me recap those and I'll start with mortgage.

In third quarter, our mortgage segment had a pre-tax loss of $26 million.

Including a $21 million charge related to the estimated cost of settling a lawsuit.

We responded by reducing more than 300 FTEs in support function since the middle of the third quarter.

Also our gain on sale margins improved to 91 basis points this quarter.

The combination of these items improved our sequential performance in that business, producing $4 million in pre-tax earnings in the fourth quarter.

In capital markets, we implemented additional efficiency measures during the fourth quarter as we continued to face subdued demand for fixed income products.

These efficiencies include reorganizing our fixed income sales force and restructuring some of our trading platforms.

We believe these initiatives will improve the long-term positioning and profitability of that business.

Asset quality in the fourth quarter remained solid as demonstrated by our decline in charge-offs from the third quarter.

Even in a slowing economy and cooling housing market, our conservative loan growth strategies are holding up.

Now that the book's been closed on 2006, and let me see say that there is nobody happier about the start of a new year than I am, I'll take a moment to reflect on the year as a whole.

In spite of the difficult environment I believe our strategies continue to position us well for improved performance in 2007 and beyond.

Actually, in 2006 we managed to achieve significant milestones that speak to the underlying strength of those strategies.

First, our retail commercial bank continued its national expansion and has become a significantly larger percentage of our bottom line due to strong growth and the decline in contribution from mortgage.

Deposits grew 7% and loans grew 8% year-over-year driven by continued success in Tennessee and our national expansion.

In Tennessee, our leadership position and strong value proposition enabled us to generate sizable market share gains and take advantage of merging competitors.

In 2006, our full service banking network grew by 21 locations, 6 in Tennessee and 15 in our national markets of Atlanta, Dallas, Northern Virginia, and Baltimore.

And speaking of national markets, national banking households grew 17% last year due to the cross sell efforts to mortgage customers and the expansion of our branch network.

Now, 43% of our national customers have purchased at least one bank product.

That's up from 37% a year ago and ahead of our own expectations.

Cross selling of deposit products was a key driver of this increase. 13% of our national customers now have a deposit product with us, up from 10% at the start of 2006.

On the commercial side of our national expansion, the construction lending business posted gains of 27% and loans outstanding compared to a year ago.

We are being very careful with this business.

We have expanded construction lending nationally, but kept our local approach.

Our culture and our local support systems allow us to recruit experienced end market staff who know their markets extremely well.

We specifically target home builders who have a track record of enduring through multiple cycles and whose loyalty to their financial partners is based upon relationship rather than price.

We operate in geographically diverse markets.

Our customer base is granular and we have managed our exposure to undeveloped land to represent only 3% of our portfolio.

As a result we believe this business line is well positioned for continued growth without significant additional asset quality risk.

In 2006 we successfully repositioned our mortgage business to be profitable in a market that's ranked by almost 20% over the course of the year.

We reduced expenses to consolidate in our sales management structure, closing unprofitable locations, and reducing nonsales head count by 23% from the start of the year.

At the same time we increased direct sales management supervision which is expected to yield gains and sales force productivity going forward.

In 2006 FTN Financial continued its evolution into a broker institutional -- I'm sorry, a broader institutional broker business.

Fees in the nonfixed income segment of that operation increased by 32% over the year before and accounted for 54% of capital markets total fee income.

Pretax income increased more than 80% in the segment in 2006 over 2005 despite lower revenues from our fixed income sales.

Turning to asset quality, charge-offs averaged 26 basis points in 2006.

Keys to our success on this front include our reliance on local expertise and focus on relationships, granularity, geographic diversity, astringent internal watch list process, and strong credit standards.

Nonperforming assets did increase from 33 basis points in fourth quarter of 2005 to 58 basis points in fourth quarter 2006 as the economy moderated and our portfolios matured.

As a result of this and our loan growth, we increased our provision expense by 23% in 2006 driving an increase in our allowance to loan loss ratio from 92 points in the fourth quarter of '05 to 98 basis points in the fourth quarter of '06.

In previous calls we have spoken to you about our goal of reaching $80 million in earning enhancements during 2006.

Today I'm pleased to report that we have achieved that goal.

And let me break it down for you.

If you remember when we sold the merchant business we utilized some of the gains to reposition our securities portfolio.

That added $31 million of incremental earnings in 2006.

We also delivered on nearly $50 million in expense reductions through initiatives across each of our major business lines.

Some of the larger projects included deploying new technologies, consolidating loan operations, and servicing, and consolidating bank operations centers.

As always, a major competitive advantage is our culture.

Recently we received the news that for the tenth consecutive year First Horizon made Fortune Magazine's list of the 100 best companies to work for.

One of only 18 companies to have earned that honor every year since the list's inception.

I couldn't be more proud of our people and the way they met the challenges of the past year.

Now I'll turn it over to Marty for detailed review of the fourth quarter results and then I'll be back for some closing thoughts and to take your questions.

Thanks.

As Ken mentioned earlier we reported earnings per share of $0.60 this quarter.

I'm going to review our business line results in detail but before I do that I would like to highlight a couple of items from the fourth quarter.

First, we realized $3 million of security gains in our corporate segment as we restructured a small portion of our investment portfolio that had become relatively more valuable in the market.

Second, we had $4 million of increased compensation expense this quarter due to severance and retirement.

It is also worthy of note that the yield curve further inverted this quarter to an average spread of negative 62 basis points, 26 basis points worse than the third quarter average.

Now let's turn to the business segment highlights for the quarter.

Starting with the retail commercial bank.

The retail commercial bank's pretax income declined from $115 million in the third quarter to $108 million in the fourth quarter.

However let me highlight a few items that explain this decrease.

Remember that third quarter included approximately $3 million in revenues associated with the sale of an investment subsidiary.

On the cost side, we experienced $7 million of expenses from other losses this quarter.

The other losses resulted from two separate acts of misrepresentation and a settlement of an insurance matter.

The first misrepresentation was a customer initiated deposit scheme in one of our full service banking market.

And the other was a result of employee misrepresentation in our construction lending business.

The retail commercial bank continues to show product growth as deposits grew 7% year-over-year and continued to grow from third quarter to fourth quarter on a sequential basis.

While loans grew 8% year-over-year they remained ultimately flat sequentially as consumer loan growth continues to slow nationally.

Despite this lower sequential growth, our asset generation capacity continues to be strong.

This is reflected in our capacity to sell $450 million of consumer loans this quarter as we have done previously.

Net interest margin in the bank declined to 4.13% a decrease of 8 basis points from third quarter.

Key drivers of this decrease were the continued shift from floating to fixed consumer loans caused by the inverted yield curve and deposit pricing competition in our full service bank markets.

Recently however, competitive deposit pricing pressures lessened, allowing us to widen spreads on certain products in our full service banking markets towards the end of the fourth quarter.

If the fourth quarter expenses in the retail commercial banking segment reflect continued attention to efficiency increasing only 3% year-over-year despite the $7 million in other losses and approximately $4 million of increment al expenses from the 21 new financial centers opened during 2006.

Going forward as product and customer growth continues and the margin stabilizes growth in the retail commercial bank should resume over the next several quarters.

However, first quarter will be unfavorably impacted by seasonality in fees and expenses.

In mortgage the actions we took to reduce costs and improve our marketing margins produced pretax income of $4 million this quarter.

Gain on sale margins improved to 91 basis points this quarter from their historically low 77 points last quarter.

You will note in our financial supplement that we are now including recourse provision on nonprime loans in our margin in an effort to enhance our transparency regarding loan repurchase activity.

While the market remains in transition margins are expected to remain in the low 90s going forward, still below our historical average of approximately 100 basis points.

Originations increased to 6.4 billion in fourth quarter.

This represented a 1% increase sequentially over the third quarter.

In comparison the Mortgage Banker's Association is currently forecasting a market decline of 8% from third to fourth quarter.

While this market data may be revised, comparisons of prior quarters continue to indicate that First Horizon's experience continues to be consistent with the rest of the industry and that we are maintaining our market share.

Net servicing income was $12 million in the fourth quarter, down slightly from $16 million in the third quarter, driven by higher hedging costs and MSR run off.

As we move throughout the rest of 2007 profitability should resume in this segment driven by sales force growth, improved productivity, and reduced fixed cost.

I want to remind you however, that mortgage originations declined seasonally in the first quarter.

Those seasonal declines are expected to offset the benefit of recent efficiency and productivity gains keeping this segment at approximately break even during the first quarter.

In capital markets revenues from other products increased 25% in fourth quarter year-over-year.

However these revenues were down versus third quarter due to the timing and size of quarterly transactions including a smaller full trust preferred transaction of $1.1 billion.

Fixed income sales in fourth quarter reflected modest improvement as compared to third quarter although demand remains generally subdued.

Going forward, fees from other products should remain strong, but will continue to be subject to transaction timing impacts.

On the fixed income side we do have opportunities to increase our business with existing customers although we do not expect general demand for fixed income to improve materially.

Overall, we expect profitability in capital markets to continue to improve in 2007.

In the Corporate segment we restructured a piece of our securities portfolio to take advantage of improved values in the market without significant incremental duration risk.

As a result we realized $3 million of security gains this quarter and should realize approximately 500,000 of annual NII benefit going forward.

I would also note that we moved deferred compensation expenses and associated revenues into the Corporate segment this quarter removing them from the other business lines to enhance transparency.

We have provided information and financial supplement to assist you in reconciling this change.

Our effective corporate tax rate this quarter was 29.2%.

This was due to tax credits from low income housing project expenses in the retail commercial bank and deferred compensation expenses in the Corporate segment.

This created no meaningful net benefit to the bottom line.

Moving to the balance sheet, net interest margin declined 4 basis points from third quarter to 2.86% in the fourth quarter driven by the aforementioned compression in the bank's margin.

This sequential compression was smaller than the 10 basis points experienced last quarter.

Also with continued strong deposit growth and execution of approximately $350 million of on balance sheet securitization, our loans to core deposit ratio declined from 163% last quarter to 161% this quarter.

As all of you know, FASB 158 was adopted this quarter which required us to recognize the funding status defined benefit post retirement plans on the balance sheet.

Including the recognition of certain items through our comprehensive income.

While shareholders equity as of period end fourth quarter was reduced by 77 million as a result all of our capital ratios remain above targeted levels.

In addition, banking regulators have released a guidance indicating that this impact will be excluded when calculating capital adequacy.

As Ken mentioned earlier asset quality remained strong again this quarter.

Net charge-offs were 25 basis points, down sequentially from last quarters 30 basis points.

Provision expenses decreased 3% sequentially, from third to fourth quarter reflecting generally stable credit quality trends.

Provisioning this quarter again exceeded our charge-offs driving the increase in our allowance to loan ratio to 98 basis points.

This increase primarily reflects the continued growth of our commercial and construction portfolios and expected moderation of quality as the economy slows.

Going forward we expect asset quality trends to deteriorate modestly, but remain solid relative to historical levels.

Finally, for the full year 2006, we reported earnings per share of $3.62, including the net impact of gains from the divestiture of our merchant business back in the first quarter.

With that I will turn the call back to Ken for closing remarks and look ahead to 2007.

Thank you, Marty.

As we look at 2007, obviously there are challenges and there are opportunities.

We have taken action to address these challenges and also believe that we have opportunities in all of our businesses that collectively will generate earnings growth in 2007.

As far as the challenges, we have assumed that there will be no improvement in the environment for 2007.

Our assumption for planning purposes is that the yield curve will remain inverted near its current levels.

We are also assuming that the housing market and the mortgage industry will continue their contractions and that other elements of the banking industry including asset quality will continue to experience deterioration as the economy slows.

As I detailed in my remarks earlier we have taken steps to address this environment.

The further reduction of support costs in mortgage and the implementation of additional efficiencies in capital markets better aligns these businesses with the direction of their respective markets.

Each of these businesses also benefited from the restructuring of their sales management teams.

Since these actions were taken in the third and fourth quarters, the full impact of approximately $20 million will be realized in 2007.

Our strategic initiatives will provide additional growth.

Our retail commercial bank will continue to take advantage of our leadership in Tennessee, further cross selling to our national customers, and growth in specialty sales forces.

Capital markets will continue to build its other products beyond the traditional fixed income market and newer opportunities include acquiring additional mortgage originators and opening international fixed income offices.

The combination of these and other strategic initiatives will produce at least $40 million of incremental pretax income in 2007.

On the expense side we have identified further efficiency initiatives that should add another $20 million to pretax earnings for 2007.

Following the $50 million accomplished in 2006.

Finally, our conservative approach to lending, broad geographic diversity, and strong credit culture should enable our asset quality trends to remain strong, relative to historical levels and industry performance.

2006 was a unique year for the Company.

As our financial performance was marked by a number of unusual items such as the sale of merchant business.

We recognize that given this, it may be difficult to get a good fix on our 2007 earnings.

Therefore we have decided to offer more specific guidance.

For 2007 we expect to produce earnings for the full year at or above the current market consensus of $2.80.

It is important to know that since the first quarter's impact by seasonality of expenses and mortgage originations, growth over the current level should tend to improve throughout the year.

These projections of course are dependent on a number of important assumptions and factors that I have outlined earlier.

Including -- I'm sorry, in closing, I, along with this entire management team have real optimism for 2007 and look forward to updating you on our progress when we report our first quarter results.

Thank you.

And now we'll take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Kevin Fitzsimmons from Sandler O'Neill.

Good morning guys.

Good morning, Kevin.

I just want to address the guidance that you just spoke about.

And given your comments about first quarter being typically, seasonally challenged by expenses and originations and the fact that you're -- it sounds like you are being very cautious and conservative about the year in saying it is going to stay a very tough environment, I'm just doing some quick math and looking at the 2.80 and saying it seems like it builds in a pretty aggressive ramp up over the course of the second and third quarter to get to that number.

So I think you talked about the things that are going to stay tough.

What -- what are you assuming is going to get dramatically better to get these numbers?

Is it all the efficiency gains?

Or is it, are there other things?

Are there capital actions that maybe we should be building in there?

Thank you.

Yes.

Thank you, Kevin.

You stated very well the first quarter and the impact on the first quarter that we mentioned.

What we have seen in the execution of our third and fourth quarters have resulted in improved margins in the mortgage business, improved other income, product income in the capital markets areas.

We have continued to invest in our retail commercial bank and those show up in many of the things you'll see in our disclosure in the fourth quarter.

Those we think we can maintain, then with the additional efficiencies that we have been addressing for the last quarter of '06 and are implementing this quarter they will definitely show up in the second quarter.

The first quarter, those will be somewhat muted if not entirely muted by the seasonality.

So if you think about the amount of seasonality we have I think it will show you what we think the benefits of those are.

Again we see an additional $20 million for next year that we have not realized any of that yet.

That will start showing up some in the first, but mostly in the second by the time we implement those.

That includes things like outsourcing some of our back office functions, changing the way we do our procurement corporately, and then you will see the normal increase in the mortgage origination business from being the drop down from the winter months that result in our deliveries being lower in the first quarter back up to the normal seasonal level of originations even in a declining type market.

Okay.

Great.

Thanks, Ken.

Could you also just address the issue of the allowance ratio and how you feel about that?

I saw you provided an excess of charge-offs this quarter and got it up to 98 basis points.

It seems like we are hearing different things from banks in terms of the regulators getting a little more active in encouraging banks to build that ratio up.

Where do you feel that ratio has to go and over what kind of time span would you think?

Good question, Kevin.

And thank you for that question.

Because we would like for the market to clearly understand how we manage our allowance for loan loss ratio or the level, more appropriately, I would say the level of our loan loss reserve.

We have a model that's -- we have developed over many, many years.

And we continue to operate that model.

Excuse me just a second.

Operate on that model.

That model takes our current experience, our projected experience, the change in the economic environment, along with the specific loans that have a specific required reserve and track the factors and we compute every quarter that the reserve is required for our model.

I mean for our loan portfolio.

Reflects the changes in the mix of products, et cetera.

We faithfully follow that model and that is how we determine the level of reserve we need and that determines the provision level that we have got to book to cover the charge-offs and the model projected level of loan loss.

Our third parties that look at our model are very comfortable with our model, that it does a very adequate job of establishing the appropriate level of reserve needed.

So as the economy would indicate that it's slowing, that model would tell us to increase our coverage ratio.

And that is the main driver of that, along with the increase in our watch list loans require more reserve requirement.

So as we talk about our watch list, and our classified increasing you'll see our reserve coverage go up.

We'll go next to Fred Cannon with KBW.

Thank you and good morning.

Good morning.

Just one quick question for you, Ken.

You said that in the -- in your remarks that you're interested in purchasing mortgage origination platforms.

And certainly we know out there there is a lot of those for sale.

I was wondering if you could give us a little bit more definition of what in fact you might be looking for?

Sure.

Up until the last couple years, as you know, we were very active in growing our mortgage origination capability by, in the down markets acquiring brokerage organizations.

They'll range from a few hundred million a year in originations to a billion plus.

We over the last year or so had diminished our level of that.

And in this market it's a very attractive time because now they realize their -- recognize their real value.

So the pricing is right.

We made one acquisition I think we announced in the fourth quarter that was a mid billion dollar range company and we have got several we are talking to right now.

But generally you could expect to see us do three, maybe four of those a year ranging from 0.5 billion up to maybe 1 billion or slightly more on an annual basis.

We generally pay one year's margin on that business to maybe a year and a half depending on how solid that organization is.

So the focus would be on retail origination and what about your appetite for sub prime origination?

Which clearly there is a lot in that area that's for sale today.

Yes.

It would definitely be on retail originations and we would focus more on those markets where we think we already have a pretty good customer base.

Sub prime or nonprime is only about 5% of our volume and we don't anticipate that it would go above that.

We are not in the market to acquire sub prime lenders.

All right.

Thank you very much on that.

I wanted to ask Marty a question on the loan portfolio, if I may.

We did see the real estate residential portfolio drop a fair amount, I think it was 5.4% linked quarter end of period and we also saw the average drop.

I'm wondering if that's a trend that may be in place given prepayment levels versus originations or if you think you are going to be able to turn those trends around?

And also if you could comment on the real estate construction piece of that business too?

Okay.

Fred, if you look at the balance sheet and you look down at the last category in the loan section you'll see real estate loans placed against other collateralized borrowings.

That increase is our on balance sheet securitization.

That on balance sheet securitization comes out of the category you are talking about.

So the majority of what you saw in decline there was more just related on how we are funding those loans.

So we are shifting them out of the portfolio and they don't leave the loan portfolio in total, but they get reclassified down to another category which represents that we have funding for those.

We are seeing some slow down in the growth of that portfolio to where we have seen a shift out of the HELOCs and we have seen some pre payments over time that have begun to offset what we have been able to grow.

We still did securitize even out of the portfolio $450 million, our origination capacity is still relatively strong.

We'll go next to Eric Wasserstrom with UBS.

Thanks.

Just a quick question, I'm trying to reconcile some of the comments that Ken made earlier or I guess maybe Marty about the mortgage volume growth and the greater productivity of the sales in the face of stable market share and a declining overall market size.

Can you just help me reconcile those two comments?

Okay.

I guess what we were trying to highlight was the fact that if you looked at our originations from third to fourth quarter we actually saw an uptick this quarter where the MBA, Mortgage Banker Association's estimate actually at this point say that that is supposed to see a decline.

We have been able to if you look at what we did this quarter go in and look at our sales force and our sales team, flatten the overall management of that increase the districts and the district management process and that would help us to increase our productivity.

So we are seeing some lift in our sales force and the productivity side and being able to kind of buck the trends that are out there in the market today.

That is how we look at that in total.

This is Jerry.

I might add as well that the strength of our retail mortgage franchise is really in the conventional conforming product not nonprime or more of the hybrid or more esoteric mortgage product.

And so the refinances that are occurring, the move toward fixed rate product is really going into the strength of our mortgage origination franchise and as a result of that we are benefiting from greater productivity out of that sales force.

I guess I'm thinking on a go forward basis, I think the MBA is anticipating some overall market decline in originations in '07 versus 06.

Yes, they are expecting about a 4% or maybe a little greater than that decline.

But as I said as we move back to more refinances and more of the conventional conforming product mix that is really in the strength of what our mortgage originators have historically done and it is certainly being demonstrated in their effectiveness of what that they are originating and bringing in now.

Does that effectively imply some anticipation of modest share gain?

Yes.

Okay.

And then just a similar question on, as I think about the components of the balance sheet and I appreciate your comments to the previous questioner.

But the -- is it fair to think about it in simple terms as continued strength in some of the C&I markets maybe a little bit less in the commercial real estate and consumer continue to be somewhat weaker?

Yes.

And if you looked at the construction side, which was the other part of that question, we have seen somewhat of a, just a flattening out on the retail side but we are still seeing growth on the commercial real estate construction.

We are also seeing when you look at the growth in the C&I loans.

The strength has shifted from a year ago it was on the consumer side.

It's shifted now to the commercial side, and we have seen, like most others nationally, kind of a stable retail market right now.

We'll go next to David Stumpf, with A.G. Edwards.

Good morning gentlemen.

Good morning, Dave.

Couple of questions.

One the NPA, slight increase in NPAs this quarter.

And really a pattern I guess of modest increases the last couple of quarters.

I know we are coming off a low base and I understand seasoning of portfolios, but any other color you might provide in the terms of type of credits there are migrating there?

Is there any pattern?

Or is there any commonality to where those kinds of credits are coming from?

It is really widespread.

It is -- really most of what we have seen so far has been in our traditional markets.

Okay.

Which is what we had highlighted in the press release.

So it is not the expansion as much as it is just relationships that we have had.

It's been -- if anything was a common theme, it was that there were very unique issues that created each of these different things to kind of bubble up.

So we have seen that occur.

We have seen just the stability in the economy.

Once the economy stops growing very rapidly, what happened is those story credits will have, one, the story goes bad the economy doesn't overcome the internal issue that might create that problem.

Is there -- would you say it is less real estate related?

A little more C&I related?

Or vice-versa.

C&I has been the biggest piece.

We have also seen a very agressive stance on looking at the real estate side, putting those on the watch list.

Right.

That's been an active management process for us to make sure we were managing through the turn in the cycle of the real estate market.

We have seen some of those go on to classified and nonperforming.

Dave, this is Ken.

Let me -- we just spent some time this past week looking at where we forecasted the year.

We track it every quarter and each of our asset quality managers and where we ended the year versus where we forecasted this time a year ago.

And in every measure, whether it's nonperforming, classified, watch list, charge-off, rate, we performed better than our forecast had starting this time last year.

Okay.

Yes, I'm not overly concerned about it.

I just--.

I understand.

But I was saying that to just say that -- that the -- these things -- this -- we believe this movement that you see is reflective of the normal progression of our lending activities and moved back to more normal levels.

Right.

The economy that is slowing.

Okay.

Second question, unrelated.

Obviously with the efficiency initiatives that you're still in process of doing, do you all anticipate any other meaningful severance items or anything that might be included in future periods?

Maybe that is a tough question to answer.

It is.

It is a tough question, Dave.

And we are working on some things that we haven't implemented yet that will require some severance.

We don't have anything on the table that's huge right now.

So I would not anticipate any abnormal level of that going through our financials for '07.

We'll go next to [Alex Lopez] with [Portals Partners.

Good morning.

Good morning, Alex.

Most of my questions have already been answered.

But, I guess, I was wondering if you can give us your thoughts on, I guess, branch expansion moving into 2007?

Well, we plan to -- this is Jerry.

We plan to open 17 new financial centers in 2007.

We opened 21 this past year. 14 of which, by the way, were in the second half of the year and we are beginning to see those pick up and add value as we go forward.

So we'll focus in middle Tennessee and our new markets as we add those 17 in this coming year.

Okay.

Out of that 17, how much of that would be in middle Tennessee, around, or--?

Oh, I think we're going to have about a third of them in middle Tennessee.

All right.

Thank you.

We'll go next to [Hunter Bracket] with Lehman Brothers.

Good morning.

Good morning.

Just a quick question on the on other income line item.

Looks like there was a pretty big jump in other, other income year-over-year from about, looks like from 21 million up to about 37 this quarter.

Just wondering if you could maybe explain a little bit about what's causing that increase or what the components are there?

Well, we have had in the last two quarters, other, other income has been 51 and $54 million.

You have some just up tick as you go through the process of the year.

It has been relatively stable over the last two quarters.

I'm trying to think whatever else might have changed.

I'll have to look at some details on that and see if there's anything else that's driving that, but I don't know of anything that's been unusual that created that uptick there.

Okay.

Yes, it looks like there was something maybe from the second to the third quarter looks like that's where the jump was.

That's correct.

Okay.

All right.

Thanks.

We'll go next to [Lothen Alexandra] with FIG Partners.

Good morning guys.

I have a follow-up on the question for your branching plans for 2007.

What are your plans for Seattle and also for Colorado?

And should we expect any meaningful contribution by those in 2007?

The question relates to Colorado and Seattle and whether we would have any meaningful contribution from those markets.

We will continue to operate in Seattle, for example, our financial center floors is where we have mortgage offices and we cross sell our mortgage customers with banking specialists.

We don't have any plans in the current time horizon to open full service banking in that market or in the Colorado market.

But we will continue to cross sell those mortgage customers using our specialists and we would continue -- expect to continue to grow that penetration to that mortgage customer base.

Great.

And also for Texas, it looks like most of your presence is concentrated in the Dallas/Fort Worth market.

Do you -- are you interested in going into any other Texas markets?

Yes, we are concentrated in Dallas and Fort Worth and we are expanding out those markets.

We do originate loans in other parts of the state where we have financial specialists, relationship managers on the ground.

And yes, over time we would grow those markets.

But not in the current horizon.

Okay.

Great.

Thank you so much.

We'll take our final question from Heather Wolf with Merrill Lynch.

Good morning.

Good morning.

Just a couple of questions.

On the securitization revenues can you give us a little color as to why those were 3 million higher this quarter than last?

Yes.

Execution in the marketplace has improved.

What we have been able to see is that as prepayments were higher, as we had a shift from the HELOC, the variable rate to the fixed rate that had pushed down some of the execution gains and the pricing in the market.

We saw that improve in the fourth quarter.

So it was really how we executed.

We didn't sell any additional volume.

It was more on the pricing that we were able to get in the marketplace.

Okay.

Great.

And then in the mortgage banking division, the warehouse spread was relatively stable even though, I think you said that we had sort of a 26 basis point more inverted curve this quarter than last.

Can you talk a little bit about why that is?

Yes, that was a shift in the product mix.

So what we are seeing is more traditional fixed income government and conventional loans.

Those typically have a wider spread on them.

So the product mix that Jerry mentioned earlier that's back in our favor in a sense of with the products that we typically do more of, also have wider spreads and that helped to offset the compression that was in the yield curve, and the yield curve compression was fairly minor this quarter 20 basis points.

And then I think you mentioned this in your commentary and I missed it.

You restated the delivery margin.

Yes, we did.

And why was that?

What is the change?

The change is what you are hearing a lot of, which are kick backs on the noon prime put backs -- in the non prime business.

Put backs.

And that is that we have -- as that comes back you have a loss in price typically or a price adjustment.

And that is showing through the execution.

So we are putting that in the execution of the nonprime business and that is why we thought it was more transparent to put it there versus in the other revenue lines.

And that concludes the question and answer session today.

At this time I would like to turn the conference back over to our speakers for any additional or closing remarks.

Before Ken closes I did want to revisit the question earlier about the other revenues.

Second to third quarter, and that is why when you look at the fourth quart and third quarter it is not unusual items building that number up as much as there were unusual items in first and second quarter that we had disclosed that actually pushed that number down.

Going all the way back to last year it was $21 million in the growth between there and where we're at today.

One was $3 million we just talked about with Heather on the loan sales and execution was favorable and then the bank's other income has actually seen an increase as we have been able to expand some of the products and some of our emerging businesses that's been very helpful.

So that is the sources of that and the first and second quarter were artificially low at the levels that they were at.

Thanks and I'll turn it over to you, Ken.

Thank you, Marty.

I want to thank all of you for joining our call.

But I would like to end it by telling you don't underestimate my enthusiasm and this company's enthusiasm about our plan for 2007.

We are very excited about our opportunities and we will execute on those opportunities.

Again, thank you for joining the call and hope everyone has a great new year.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.