First Horizon Corp (FHN) 2007 Q3 法說會逐字稿

Good day, everyone.

Welcome to First Horizon National Corporation third quarter's earnings conference call.

Today's call is being recorded.

In addition, you can listen to this conference simultaneously at www.fhnc.com.

Again, that is www.fhnc.com.

At the investor relations link.

Hosting the call today from First Horizon National Corporation are Jerry Baker, Chief Executive Officer; and Bryan Jordan, Chief Financial Officer.

They are joined by Dave Miller Director of Investor Relations for First Horizon.

At this time all participants have been placed in a listen only mode.

Later the floor will be open for your questions.

Mr.

Miller, you may begin, sir.

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 details are provided 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 CEO, Jerry Baker.

Good morning.

Thank you for joining the call.

Let me start by saying that we face market pressures this quarter similar to many other financial services companies.

But we also did some solid work in further establishing a foundation for profitable growth.

Our reported loss of $0.11 per share this quarter includes approximately $30 million or $0.20 per share and charges for restructuring, repositioning, and efficiency initiatives.

We also have roughly $65 million of unusual impacts from credit market disruptions to our businesses.

Bryan will go through the details with you shortly since I believe it will be helpful for us to spend sometime reviewing the quarter's market impacts.

In response to market conditions, we have adjust pricing of market originations and concentrated on informing products.

We have managed down inventories and commitments and capital markets.

And positioned the balance sheet well.

I believe these challenges are temporary and we continue to take actions that will have a long-term positive impact on the profitability of First Horizon.

We are making investments in our Tennessee banking franchise.

We have committed to building new financial centers in the high growth markets in the state and expect to open ten or so a year for the next several years.

We're focused on gathering deposits and adding top talent and we have increased our emphasis on sales and marketing to expand our already leading market share in the state.

We are already experiencing a near term lift from this effort.

With a long-term goal to move our Tennessee market share above 30%.

Our banking success in Tennessee is being recognized externally as well.

First Tennessee's business banking was recently given the overall banking services award for excellence in serving small business customers like Greenwich Associates.

First Tennessee was one of only 22 banks recognized with this top honor and one of only 15 banks that repeated as a winner this year.

Additionally, we're continuing our careful review of all aspects of our business to identify areas for improvement.

This ongoing review has already led to a series of meaningful actions that will improve near term results and long-term return on capital.

First, we announced recently that we have agreements to sell our first First Horizon bank branches.

These transactions include all 34 full service locations and we expect them to be concluded by early next year.

We were pleased with the outcome and believe that it is a testament to the quality of our people and operations in those markets.

Second, as we announced in September, we are reducing our dependency on real estate related businesses by significantly cutting our national sales forces and related support costs.

These actions should reduce earnings volatility and free up capital for higher return businesses or share repurchase as we shrink our home builder, one time close, and home equity national portfolios by over $2 billion over the next year.

We will also look for opportunities to sell mortgage servicing rights when market conditions improve.

And explore other avenues to further reduce our exposure to the mortgage business.

Third, we are taking other steps to adjust our business operations to improve profitability.

These include shutting down our small business program out of Tennessee.

Refocusing our national deposit gathering on remote delivery via the Internet and exiting the floor plan lending business in our traditional markets.

We will realize other opportunities to improve our businesses as we continue our systematic review.

Finally, we are still on track to achieve our targeted $175 billion in annual efficiency and productivity benefits by first quarter 2008.

That means permanently reducing our head count and expense run rate.

Once we reach our goal we will continue to review other expenses.

I believe there is more we can do.

The impact of these actions I just outlined is significant.

Our total FTE employees are now about 11,000.

Down more than 1,000 from a year ago and we expect that number to decline further in 2008, probably to around 10,000 or less.

Our objective has been to retain our top sales people while consolidating back office functions resulting in a substantial improvement in productivity.

With this approach, we believe we can sustain and actually enhance our competitive advantage, our people.

The financial benefit of these efforts is also substantial.

As I said, we are on track to execute $175 million of productivity and efficiency improvements.

As of the end of the third quarter, we'd estimate that roughly $115 million of that annual benefit is in our run rate.

Additionally, the sale of the First Horizon bank branches will improve pre-tax income by 30 million to $40 million annually and the restructure of mortgage and our national specialty businesses will improve profitability by another 30 million to $40 million.

Our real estate businesses are changing and we remain focused on the management and quality of our current portfolios.

In today's environment we are directing additional resources to manage problem loans which remain a relatively small portion of our total portfolio as the economy slows and the housing market weakens further, we are seeing expected deterioration in real estate loans.

And so we added to reserves again in the third quarter as provision for loan losses exceed charge-offs.

I'm sure there will be some unpredictability about -- unpredictability going forward.

But we expect asset quality cost to remain manageable as we move to next year.

Let me recap.

We are committed to the process of evaluating all opportunities to make our Company better.

And to taking swift action when these opportunities present themselves.

We expect there will be some further efficiency and restructuring charges in the fourth quarter and first quarter 2008.

But there should also be gains associated with the sale of the First Horizon bank branches.

I believe the changes I've outlined today will significantly improve return on equity, add to book value and reward our shareholders accordingly.

In the mean time we are comfortable that our capital position will support us as we make the necessary improvements to our business.

On another note, our Board of Directors have recently authorized the repurchase of up to 7.5 million shares over the next three years giving us flexibility to redeploy the excess capital that will be freed up over the course of our business restructuring efforts.

They also approve the quarterly dividend of $0.45.

Over the past few months we have been asked several times about the sustainability of our current dividend.

While our recommendation to the Board regarding dividends each quarter takes into account many factors, we believe that our current capital position, core operating results, and initiatives to improve efficiencies and rebalance our business mix along with capital freed up as we reduce national lending portfolios provides sufficient capital to sustain our current dividend and enable us to make investments in the near term.

As these factors change we will factor them into our recommendations to the Board.

But our efforts are focused on improving earnings and as a result reducing our dividend payout ratio below the current level.

Now, I will turn it over to Bryan for his comments and later we will take your questions.

Thank you, Jerry.

Good morning, everyone.

Our reported results this quarter were a loss of $14 million or $0.11 per share reflecting several unusual items.

Including disruptions in the credit markets.

As we incur charges of $33 million this quarter from restructuring, repositioning, and efficiency initiatives.

These charges are related to our efficiency efforts, the First Horizon bank divestitures, restructuring of our mortgage business, and the downsizing of national specialty businesses.

All charges are recorded in our Corporate segment and we have again provided a detail schedule in our financial supplement to explain which line items these charges impact on a consolidated income statement.

My detailed comments this morning will be divided into three main parts.

First, the impact of the credit markets had during the quarter and how we responded.

Next, I'll review the progress being made with our restructuring, repositioning, and efficiency efforts.

Then the highlights from each of our businesses.

Since there are a number of details, Dave and I will be glad to follow-up with you after the call to review the specifics.

As you know, we are in a number of businesses that are subject to inherent market related risks.

In the third quarter, we experience approximately $65 million of aggregate negative pre-tax impact to our mortgage, capital markets, and consumer lending businesses as a result of widening credit spreads and associated market illiquidity.

First in mortgage banking, enter a mortgage spread widened out substantially during the third quarter.

Although the majority of our production has always been GSE eligible or government the value of prime, nonconforming loans in our warehouse and locked pipeline diminish significantly.

The widening of mortgage swap spreads helped improve MSR hedging results and servicing runoff also slowed providing additional offsetting benefit.

In total, the negative mark to market and lower cost of market or low com impacts and the net hedging and runoff benefits reduced profitability in our mortgage business by approximately $45 million during the quarter.

Second, in capital markets, disruptions in the CDO market significantly decreased demand for pool trust preferred securities in the third quarter.

Accordingly we completed a smaller issuance of $330 million this quarter in the disrupted environment.

The impact of this disruption on our pool trust preferred product reduced capital markets profitability by approximately $15 million in the third quarter.

While our structured finance business will remain subject to quarterly fluctuations, we believe the market will come back as it is an important source of capital for smaller banks.

In national consumer lending, our quarterly sales of consumer loans were also disrupted in the third quarter as investor demand for even high quality home equity product dried up.

As a result, we incurred approximately $5 million of increased low com in our retail commercial banking segment this quarter and had significantly diminished revenue from loan sales.

We are not certain when or if the secondary market for consumer home equity loans will come back and have adjusted our operations to reflect this outlook.

We responded to these market conditions throughout our businesses.

In mortgage, we significantly adjusted pricing and product mix and sold rather than balance sheeting $1.3 billion of our prime nonconforming production.

Leveraging our capital market distribution system.

We did retain $19 million of subordinated bonds at the end of the quarter since they have attractive yields and solid credit metrics.

In capital markets, we reduced our total average earning assets by approximately $900 million in the third quarter compared to second quarter primarily due to a reduction in averaged fixed income trading inventory from $2.5 billion in the second quarter to $1.8 billion in the third quarter.

During the third quarter, we also designated a small amount of trust preferred loans with good underlining credit characteristics as help to maturity.

We also managed our trust preferred warehouse to mitigate risk in the current market environment.

While the overall deal size of the pool trust preferred transactions we have completed over the past two years has ranged from approximately $600 million to $1.6 billion, typically less than 50% of the underlying collateral in these transactions have been prefunded on our balance sheet.

Additionally, as market conditions change this quarter, we slowed the rate of prefunding commitment and adjusted our pricing on funding that we did make.

As a result, we incurred only a minimal low com adjustment on our trust preferred warehouse at quarter end.

International consumer lending business, we have eliminated originations of stand alone product.

We held $300 million of consumer loans that would otherwise have been sold or considered held for sale in prior quarters.

These consumer loans have good yields and strong underlying credit risk with a average FICA score of 740 and an average CLTV of 86%.

Our overall liquidity position is solid.

We adjusted our funding strategies throughout the quarter according to market conditions.

As a result, of reduced liquidity and higher borrowing costs in the consumer CD market.

We shifted $2 billion in wholesale funding from short-term CDs to lower cost federal home loan bank advances.

During the quarter, we sold substantially all of current mortgage, HELOC, and other production to manage future balance sheet flexibility.

Our loans to quarter deposits ratio was 163% at the end of the third quarter, nearly in line with the second quarter at 157%.

As we continue to implement changes in our national real estate construction and national home equity lending businesses we expect this ratio to improve going forward.

As we have seen market conditions stabilize somewhat since mid September, while we do not see the market for the unperforming mortgage product improving significantly in the near term, we don't expect a great deal of further spread widening and this production has been priced accordingly.

Although difficult to predict, the pool trust preferred market should begin to stabilize over the next few months.

Now, I will move on to our repositioning, restructuring, and efficiency initiatives.

We are focused on improving returns on capital despite a challenging market by moving to further reduce costs and restructure certain businesses.

We should see substantial annual pre-tax benefits from these efforts across four broad areas.

First, with our enterprise-wide efficiency initiatives we continue to execute on our efficiency and productivity improvements combined with 2006 initiatives, the 2007 efforts are expected to produce about $175 million of annual benefit by the first quarter of 2008.

We are are currently tracking over 75 individual projects that make up these efficiency initiatives.

We do not expect these cost reduction efforts to have a meaningful adverse impact on revenues or customer service.

You will note that our operating expenses decreased $36 million from second to third quarter driven by the realization of lower variable costs and roughly $12 million in additional efficiencies related to these initiatives.

As Jerry pointed out, our third quarter run rate reflects approximately $115 million of annualized benefit of our targeted $175 million of annualized cost reductions.

Second, the sale of the First Horizon bank should improve pre-tax income by approximately 30 million to $40 million annually.

Some benefit will be realized late in the fourth quarter of this year, but the majority will be late in the first quarter of 2008 as we complete the divestitures.

Please note that since we signed definitive agreements in September for the sale of the First Horizon bank branches we moved $511 million of deposits and $565 million of loans into held for sale categories as of the end of the third quarter.

We have broken these out for you on the consolidated balance sheet and our financial supplement.

Third, we are restructuring our mortgage business.

We are eliminating the lower 50% of our retail sales force, reducing wholesale account executives and management.

Closing 50 to 60 offices.

Decreasing wage support staff and cutting back -- and cutting other back office costs such as technology.

We expect to have the majority of savings in place by the middle of the fourth quarter.

Fourth, we are downsizing our national specialty businesses.

We will reduce our sales forces in construction lending and consumer lending as we pare back originations and focus on current relationships.

We will also eliminate our national small business program and are significantly downsizing our network of national FSMs.

We expect to have many of these savings accomplished by year end, although some will be phased in over 2008 as we manage down existing construction commitment.

The net impact of restructuring our mortgage and national specialty businesses should add an additional 30 million to $40 million to our annualized pre-tax run rate over the next several quarters.

Over the next two quarters, we would expect to incur additional charges associated with these efficiency and restructuring initiatives.

In addition, we currently expect up to $40 million in gains from divestitures.

We have again provided a detailed schedule in the financial supplement to explain these restructured initiatives as clearly as possible including charges and their impact on the consolidated income statement, estimated benefits by segment, and an estimated benefit realization timetable.

Now I will move on to the highlights from each of our business lines.

In the retail commercial bank, we are focusing on improving profitability and growing market share in our Tennessee full service banking operations.

We have adjusted our deposit pricing to more competitive levels, and we have also increased marketing spending as we launched a major statewide campaign to engage our sales force to bring in new customers, especially in light of ongoing competitor consolidations.

Our activities are particularly focused on bringing in deposits as well as primary consumer and business relationships.

The results of these efforts appear to be paying off.

During the third quarter, net consumer checking accounts increased by 9000 accounts, up 35% from last quarter and more than double the net growth experienced in third quarter of 2006.

Business customer growth has been encouraging as well.

As a result of these actions, direct contribution from First Tennessee bank increased 4% sequentially.

We expect growth to continue in the quarters ahead as we reap the benefits of our investments and the opening of new financial centers in Tennessee.

The pre-tax income for the total retail commercial bank segment declined 4% sequentially to $78 million in the third quarter.

This decline was driven mainly by increased provision expenses for our national construction businesses and reduced consumer loan sales in our national consumer lending business.

Deposits in the retail commercial bank grew slightly over second quarter and 2% year-over-year, and deposit fees increased 4% sequentially driven by primary account growth and higher transaction fees.

Loans declined 1% sequentially over second quarter, and increased 2% year-over-year.

As we've mentioned, we expect tighter underwriting and sales force reductions to shrink our real estate loans by $2 billion over the next year.

The net interest margin in the retail commercial bank was relatively flat compared to the second quarter at 3.88% in the third quarter driven largely by improved spreads in Tennessee, offsetting continued pricing pressure on consumer and construction loans in our national markets.

Expenses declined 6% sequentially and the efficiency ratio improved by over 200 basis points as we had lower variable compensation costs and we continued to realize the benefit of our ongoing restructuring, repositioning, and efficiency efforts.

In the mortgage business, pre-tax income for the third quarter was a loss of $46 million, $30 million below second quarter levels.

Originations declined 8% over second quarter to $6.7 billion in the third quarter.

72% of volume was prime, conventional, or government product up from 66% last quarter.

However, based on changes made midway through the quarter, we would expect 85% of new production going forward to be GSE eligible as nonconforming origination volumes declined.

Gain on sale margins declined from 76 basis points in the second quarter to negative 33 basis points in the third quarter driven by the market impact already discussed.

MSR runoff declined to $49 million in the third quarter from $63 million in the second quarter driven primarily by increases in coupon rates on nonconforming loans and disruptions in the mortgage market.

MSR net hedging performance improved significantly to a positive $22 million in the third quarter, [$37 million better than $15 million] (audio difficulties) loss last quarter.

As spreads between mortgage and swap rates widened.

Option volatility increased and seasonality moved in our favor.

We do not expect to sustain this level of positive hedge performance going forward.

Expenses in mortgage banking decreased $7 million from second to third quarter primarily driven by the impact of efficiency and restructuring initiatives and lower legal expenses which were partially offset by the timing of origination costs.

Going forward, we expect volume to slow and pricing to remain challenging in the mortgage business.

Absent further incremental disruptions to the mortgage market we believe that our product and cost structure changes should enable the mortgage segment to return to around break even in the fourth quarter.

In the capital market segment, pre-tax income declined sequentially from $13 million in the second quarter to a loss of $8 million in the third quarter.

Fixed income revenues were $46 million this quarter as compared to $48 million in the second quarter.

As the Fed cut rates and the yield curve steepen, we did see a pick-up late in the fourth quarter.

Other product revenues declined significantly from $42 million in the second quarter to $16 million in the third quarter.

As our structured finance business was significantly impacted by credit market disruptions, namely full trust preferred issuances.

Going forward, we expect continued demand from our institutional client base to raise capital through trust preferred issuances.

While we believe that investor demand for these securities will recover, it is difficult to predict when this might occur.

Capital markets expenses declined $7 million from second quarter to third quarter, as lower revenues drove lower variable compensation costs and we remain focused on expense control in a challenging environment.

Turning to our consolidated financials, the tax benefit on $9 million this quarter primarily reflects our normal statutory federal and state rates and permanent tax benefits of $7 million offset by $7 million of increased taxes from nondeductible goodwill included in our restructuring charges.

Corporate net interest margin increased from 2.79% last quarter to 2.87% in the third quarter primarily driven by lower trading assets and capital markets, a smaller mortgage warehouse, and a decrease in wholesale funding costs from a lower effective Fed funds rate.

Going forward, we expect the margin to improve somewhat with a steeper yield curve and the reduction of lower margin businesses.

Including the First Horizon bank branches and national consumer lending.

Given the slowing economy and the weakening housing market, we are particularly focused on managing asset quality.

We have committed additional resources to managing problem loans.

Overall, our C&I and consumer lending portfolios remain healthy, and our greatest attention remains focused on our national construction businesses.

Charge-offs in the third quarter increased 57 basis points versus the 41 bases points experienced in the second quarter.

Deterioration of problem construction loans were a key driver in the charge-off increase and we also addressed a few individual C&I loans in our full service bank markets.

MPAs increased from 81 basis points last quarter to 113 basis points in the third quarter.

Primarily reflecting downward migration of home builder and condominium construction loans.

One time close loans also contributed to the increase.

Our allowance to loan ratio increased from 103 basis points last quarter to 108 basis points in the third quarter as we provisioned an excess of charge-offs again this quarter.

Provision expense were relatively flat sequentially at $43 million, but rose excluding the $8 million of additional provision last quarter associated with the divestiture of some national loans.

In the OTC portfolio, we are aggressively managing weakening credits.

Issues were magnified in specific markets like Florida where home loan values have declined and where real estate speculation was widespread.

We have made significant changes to the way we approach this business.

Including equity requirements, product channels, and process management.

And we are confident in the quality of current production.

However, problem asset levels and resulting charge-offs in this portfolio are likely to increase somewhat throughout 2008.

Inflow to nonperforming is expected to remain near current level while outflow via remediation and disposition will continue to be a slower process.

Problem loans and our home builder finance portfolio increased in the third quarter as well.

While pressure was evident across several markets, other markets and specific segments remain largely unaffected.

We are focused on portfolio management and are leveraging the experience of our bankers from prior cycles to manage this book.

We continue to have confidence in our approach to this business.

But we expect pressure on portfolio metrics going forward.

Our home equity portfolio performance remains steady.

Favorable to the industry and better than expected.

We expect some deterioration in this portfolio over time due to market conditions but continue to expect our performance to be favorable relative to peers.

We attribute this to high quality borrowers, predominantly retail originations, and sound underwriting.

While we expect continued challenges within our construction portfolios and may experience some bleed over to home equity and C&I book, credit costs are expected to remain manageable as we move into 2008.

Of course, we may continue to see quarterly variances caused by lumpiness from individual credits.

In summary, given the difficult markets of the third quarter we are pleased with the progress we are making to rebalance our business mix, realize efficiencies, and build a more predictable earnings base.

We still have additional work to do, but our core franchise is strong and we are executing on the steps necessary to drive long-term shareholder value creation.

With that I will turn it back over to Jerry for some closing thoughts.

Thanks, Bryan.

That was a lot to cover.

In conclusion, we expect the operating environment to continue to have its challenges.

Although we should see some improvement over the turbulent events of the third quarter.

We expect continued weakening of the housing market as some inventories climb, prices soften, and some buyers are removed from the marketplace by less availability of credit.

However, conditions will clearly vary by market and price point.

And we see many of First Horizon markets remaining stable.

Credit markets appear to be returning towards more rational behavior.

The fed rate, cuts, and modernization of federal loan programs should help some borrowers.

The yield curve has steepened somewhat.

Although the spread between LIBOR and fed funds remains elevated.

I do not want to use the market as an excuse for performance.

We must continue to make changes to improve our ability to perform well in many different environments.

To that end we remain focused on investing in our Tennessee banking franchise while completing the divestiture of our First Horizon banks.

Downsizing our national mortgage and specialty banking businesses.

Executing on the many efficiency initiatives we have previously outlined.

Maintaining asset quality.

And reviewing all business areas for further opportunities to improve returns.

We have more work to do and more opportunities to improve our profitability.

We will substantially increase shareholder value by reducing our real estate exposure, lowering earnings volatility and freeing up capital that can be redeployed for higher return activities or used for share repurchase.

We believe the decisions we are making will reward our shareholders over the long term.

Now let me turn it back over to the operator and open it up for your questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS) For our first question we go to Tony Davis with Stifel Nicolaus.

Jerry, Bryan, good morning.

It's a difficult time out there.

The last time I remember you disclosing this I think was probably back in March.

And I think the number at that point was around 4%.

I wonder, if you could give us some idea of what the watch list looks like right now relative to total loans and could you give us a little more color on the risk classification migrations you are seeing outside of residential construction.

I think that watch list percentage is up around 4.5%.

Oh, it's down.

Bryan gave me the high side and it's down to about 3.5%.

Now our detailed red and yellow and green is still the same suspects as you have seen in the past.

It's Florida, I think around Georgia, Atlanta marketplace.

Washington, D.C., a little bit in California.

Bryan, why don't you add to that.

The thing I would add is that in terms of our risk rating, we have seen a little bit pressure on downward migration and we would expect that to continue in this part of the cycle.

In some sense the depth and severity of what we are seeing in the markets will continue to pull it down if this persists.

We are very actively monitoring it.

We have got a tremendous amount of resources dedicated to managing problem assets.

But at this point in the cycle although watched lists is down a little bit, we think credit risk ratings will probably have more of a negative vice in the near term than a positive vice.

Bryan, I don't know if you disclosed that, what's the average LTV on the commercial real estate right now?

On commercial real estate?

I'm not sure you can express it that way because you have got so much on a -- a spread across so many different categories.

I would suggest that an average is going to be -- I don't know, Dave, we might want to get back with him on this.

We can follow-up with you, Tony.

I would probably -- it's going to be vary -- clearly you are going to have -- we do have lower LTVs on land and AND and your LTV on vertical construction might go up to an 80% kind of a level.

We will follow-up with you, Tony.

That portfolio has been performing very well.

And we feel very comfortable with what we are seeing there.

It's more in the construction, the residential construction side that we have bigger concerns.

I was speaking of the construction side.

Tony, I would add one other thing.

It might be a good point to make, would be of interest to others as well.

And that I see some discussion in the news that the housing crunch may last a quarter or so.

I think our view is that it goes well into 2008.

I don't think it is going to be short-term, in many ways in the residential marketplace it's driven by the lack of availability of financing for home buyers.

Both ends of the spectrum.

There is a fair amount of availability for conforming product but not for nonconforming, even for good credit worthy borrowers.

Until that eases some, I think it is going to have continued pressures on the absorption of already built or soon to be built homes.

We go next to Christopher Marinac with FIG Partners.

Good morning.

Jerry, I just want to clarify the dividend review is that done monthly?

Quarterly?

And when was the last time that the Board visited that?

We review that every quarter and present it to the Board quarterly and that was done several days ago as we went through our board meeting.

The next time that is up on the agenda will be January?

That's correct.

The follow-up question is in general, what would be your goals for the deposit franchise in 2008, focus on Tennessee and back to basics there?

Chris, this is Bryan.

Good morning.

As we focus on the Tennessee market over the next year, we are really expecting very attractive growth rate.

We think that the advertising and marketing we have put into the market, the steps we have taken around competitive pricing in segments of the market coupled with our power of ten campaign which is designed to engage our sales force and growing both the consumer and the business commercial type deposit in our footprint.

We see significant traction starting to build.

So we would expect something in the low to mid single digits in terms of deposit growth next year in the state of Tennessee.

From a corporate perspective that will be masked by the sale of the deposits which we talked about in the First Horizon branches.

We expect pretty attractive growth in the state of Tennessee next year.

I might add, too, we've typically experienced about 50 basis points of market share growth in Tennessee.

A little better in the last year.

And we would expect it to be strong above 50 basis points, maybe as much as 100 basis points improvement.

Their consolidations in the state as well as what Bryan said, our focus on marketing and communications in the state on what we call the power of ten and the engagement of our, not just our branch staff, but all of our relationship management and wealth management teams all focused together on growing deposits and increasing new customers.

We go next to Eric Wasserstrom with UBS.

Good morning, gentlemen.

I was wondering if you could help me prioritize your uses of capital.

Seems like there is a lot of conflicting pressures on capital.

On the one hand obviously a very high dividend on compressed earnings, also made the announcement about the share repurchase authorization.

Seems like there could be some benefit from cost savings, conversely credit pressures are also notching.

Can you just help me understand where you prioritize the use of capital right now?

Eric, this is Bryan.

In terms of priorities right now, we feel like we have adequate capital to support the growth that we see in the balance sheet and what we need to invest in the business over the near term.

As we shrink the portfolios that Jerry enumerated in the comments and I touched on as well, we should free up a significant amount of capital over the next year.

That coupled with our improvement initiatives around efficiencies, restructuring the mortgage business and driving greater profitability there, we think drives the payout ratio on the dividend down by increased earnings.

So in the near term we wouldn't expect to be active in share repurchase.

We do think it's important given the shrinking that we expect in certain portfolios in the balance sheet to have the flexibility over the next two or three years to purchase the stock when it is attractive.

In the near term we think we have adequate capital.

It's designed to support the dividend to drive enhanced earnings and drive that payout ratio down.

Thanks very much.

For our next question we will go to Heather Wolf with Merrill Lynch.

Good morning.

I was just taking a look at the charge-offs that you have taken in the two construction portfolios relative to the nonperforming loans.

It doesn't appear that you're expecting material loss severity.

I'm wondering if I've interpreted that correctly and if you can put any numbers behind it?

Heather, this is Bryan.

I would say material is a term of art rather than science.

We have seen those losses tick up, substantially all of the growth in our losses were in the one time close in the home builder finance product.

We expect that they should remain elevated for a period of time.

I think in the one time closed product we had a little over $6 million in losses and about $5 million or so in the home builder finance.

On an annualized basis that is a higher than we would hope for run rate.

But we -- as we said, until we get clarity about the depth and severity of what goes on in housing, we feel like there is sustained at these levels and maybe a little bit upper pressure.

But we think it's manageable.

And just a quick follow-up to that, does your capital plan assume that there isn't substantial pressure to your credit costs over the next year.

Well, as we look at the capital plan, we factor in credit costs and as I said, we assume that credit costs will be elevated and maybe up somewhat from here.

But in terms of severity, we have not put clearly very -- we haven't elevated it significantly because we think at this level we think it's manageable.

And we can work through it.

We go next to Fred Cannon with Keefe, Bruyette & Woods.

Thanks and good morning.

This question is really for Jerry.

Really a question is what is the national outside of Tennessee strategy for the Company at this point in time?

After over a decade I believe of kind of expanding based on following mortgage up with branch breaking, it would appear you are scaling back significantly in branch levels in mortgage and in the national asset gathering strategies.

I was wondering are we evolving back to a Tennessee bank away from the national strategy?

What exactly are you planning on nationally moving forward?

Fred, I would say that we are a bank that is community focused and that focus is in primarily in markets that are in and around Tennessee and in the southeast.

Yes, we have a national business in our middle market lending.

And asset base lending.

Of course, our capital markets activity in mortgage and many markets around the country.

In terms of banking, I think our best focus for certainly the short-term and over the next year or two is around and in Tennessee and in the markets adjacent to Tennessee.

Okay.

Then are those national businesses that you also mentioned critical to your strategy moving forward?

Are you essentially re-evaluating the important stuff?

I think they are a positive complement to our strategy.

In many ways these businesses intersect and intertwine together.

Certainly capital markets with our banking activity and with mortgage and vice versa.

And I think we are getting better at having our various specialty businesses work together.

But I think it's clear with the size of our organization that we will do best focused on a broader regional basis.

Not just in Tennessee, but on a broader regional basis than national.

We will go next to Bob Patten with Morgan Keegan.

Most of my questions have been asked.

I guess just on a bigger picture, Bryan and Jerry, where are you in the overall business review?

I would assume you completed at this point and then if you are completed and it's all about execution, where -- what is left or what else can you do in terms of business rationalization here that you don't think you have done.

What stones are left unturned?

I think, Bob, one of the things that we are focused on heavily is how do we maximize the businesses that we are in today?

Are we in the right segments in terms of our customer activity?

Are we maximizing it between different segments of customer relationships and business relationships.

How do we fine tune both our pricing in those different aspects of what we do and we are going through that.

And so there is a little more work to do in that area.

There are few businesses that we are watching to see if they perform as we expect.

I expect that they will.

But we still want to continue to watch those because our game is to make sure that we are delivering as much value from the businesses we are in.

We are getting to the point as, certainly as we enter 2008 its execution.

Can you give us a sense of the moving parts over the next two quarters because now we are talking about charges going into '08 in terms of gains in charges left and where they are attributed to?

Bob, this is Bryan.

I think the bulk of the charges will be realized in the fourth quarter and we are still within the original framework that we said, somewhere between 90 million and $100 million.

So probably another 20 million, maybe $30 million in charges.

That will be offset by the premiums on the sale of the First Horizon branches.

The bulk of that will be in the first quarter because that's when those divestitures closed.

We will have a little bit in November that offset the charges.

But we expect up to a $40 million of net premium there.

Offset by a little bit of severance and costs we have yet to accrue.

All right.

Thanks, Bryan.

And then last question, obviously with your dividend payout ratio, peaking and your yield now at 7.5% people are getting very uncomfortable in terms of how this Company can sustain this dividend.

Obviously what's still the capital markets and mortgage businesses under stress, what is the dialogue that you go through with your Board in terms of justifying that dividend?

Bryan, you just did it, so go ahead.

Jerry's comments and mine, Bob, we are very attuned to the need to drive that payout ratio down by increasing our earnings level.

We think the initiatives that we have in place will do that.

If you remove the market dislocations and the one-time costs from this quarter, we think our core earnings rate is approaching the level of the dividend.

You take into account the additional efficiency initiatives we have.

The opportunities we think were realized from the actions in the mortgage and the national businesses as well as the divestiture of First Horizon banks we think we can get to a place where we reduce that payout ratio below 100% as we talk to the Board we make that as a very clear point, and we also really talk about the issues that Jerry has enumerated.

Can we support the growth and the investments that we need to make in the business?

And make the right kind of investment for the long term?

As Jerry said, it's a quarter to quarter evaluation.

And we are very mindful of it and stay very focused on it.

And we go next to [Chris Sideman] with [Whole C Capital].

Good morning.

Not to beat a dead horse here, but with respect to the dividend, could you maybe walk us through the constraints on the parent's ability to upstream cash from the bank and also from the nonbank subsidiaries which apparently turned in losses this quarter?

Maybe could you also comment as to whether or not the regulators have sort of blessed your calculations in terms of the sustainability of that dividend let's say going into next year?

Chris, this is Bryan again.

In broad terms it's not quite this simple, but in broad terms you have available earnings from the two previous years plus earnings from the current year available in the regulatory calculation.

There is also a provision to make a request from the regulators.

We are -- it's not a computation that the regulators would bless.

They are very mindful of our need for capital in the bank and as we look at the capital ratios in the banking organization, we want to maintain very strong capital levels there.

But the big limitation on cash flow to pay dividend for the holding Company does come out of the banking franchise.

Principally because that's where the bulk of the earnings exists.

We feel like we have adequate liquidity at the holding Company and we have adequate dividend availability as we move into 2008 to sustain the dividend if we can deliver on the things that we have said which are the improved earnings initiatives and the gains we expect to get out of the First Horizon divestitures and the mortgage and national market activities.

At the end of the day the calculation is going to be greatly influenced by our ability to do the things that we said we are doing to improve that earnings rate from, no matter how you define the third quarter in terms of a core rate.

But to get that up above the 45 and greater level to drive that payout ratio down.

With a follow-up question we return to Bob Patten with Morgan Keegan.

I got to ask the question, I'm looking at the capital markets business and I'm looking at the trust preferred business which was a great business of yours for a long time but that's a CDO business and that market is closed.

Everybody is optimistic that it is going to get better.

How do you weigh the value of capital markets in this environment if we are sitting here a year from now and we could be with a market that's locked up?

Versus the cost and the carry.

Bob, this is Bryan again.

The CDO market has been slow.

We did get a small issuance done, about $330 million in the quarter.

There is still a very strong demand from issuers too, to issue product.

It's an important part of the capital structure for really the financial services industry.

And ultimately we think that that market will come back.

We think it's an important part of the capital structure.

We aren't sure whether it's the fourth quarter or the first quarter.

We are encouraged by, that it moved a little bit in the third quarter.

And we hope that it will start to move in the fourth quarter.

We think capital markets as a business is an important part of our business.

It's important that we integrate it further into the banking business over the next year or so.

And we have taken steps to do that in the past.

It's been an important part of our distribution network for product that was originated in other channels.

It's involved in our banking businesses.

So it's an important business.

We think that the CDO, the pool trust preferred business will come back and we think the actions that we've got in place to further integrate that into our customer service model to enable us to be effective in serving broad customer needs is very important.

Including the continued improvement in fixed income business that was strongest the last two or three months that we have seen in a long time besides contingent activity and the other aspects of what is really a balanced broker dealer.

Two or three weeks.

Okay, thanks.

Thanks, Bob.

With that, ladies and gentlemen, we have no further questions on our roster.

Therefore, Mr.

Baker, I will turn the conference back over to you for any closing remarks.

Thank you very much.

We had good questions.

We appreciate the opportunity to have dialogue with you.

We feel like we are making the changes that need to be made.

We are confident in the actions we are taking and what we are doing as we go forward here and be anxious to be back with you in January and share with you the progress we have made over the intervening several months here.

Thank you very much and have a great rest of the day.

And, ladies and gentlemen, this does conclude the First Horizon National Corporation conference call.

We do appreciate your participation and you may disconnect at this time.