First Horizon Corp (FHN) 2008 Q4 法說會逐字稿

Good day and welcome to the First Horizon National Corporations fourth quarter earnings conference call.

Today's call is being recorded.

In addition you can listen simultaneously at www.FHNC.Com at the investor relations link.

At this time all participants have been placed in a less in only mode but the floor will be open for questions.

Mr.

Miller, you may begin.

Thank you, Operator.

Please note that our press release and financial supplement as well as the slide presentation we'll use this morning are posted on the investor relations section of our website at www.FHNC.Com.

Before we begin, we need to inform you that this conference call contains forward-looking statements which may include guidance involving significant risk 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 10K.

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.

In addition non-GAAP financial information may be noted in this conference call.

A reconciliation of that non-GAAP information to comparable GAAP information will be provided as needed in the appendix of the slide presentation available in the investor relations area of our website.

Listeners are encouraged to review any such reconciliations after this call.

Also, please remember that this webcast on our website is the only authorized record of this call.

This mornings speakers include our CEO, Bryan Jordan; our Chief Credit Officer, Greg Olivier; and our new CFO, BJ Losch; also joining us is our Treasurer, Tommy Adams.

With that I'll turn it over to Brian.

Thank you, Dave.

Good morning.

Thanks for joining our call.

2008 was unquestionably one of the most difficult years the financial service industry has ever faced, yet it marked a year of significant strategic change for the better at First Horizon.

Our fourth quarter results while negatively affected by a worsening economy and further housing market deterioration showed real signs of progress and benefits of actions taken this year.

Earnings per share were a loss of $0.27 for the fourth quarter, an improvement over last quarters loss of $0.61.

Full year 2008 EPS was a loss of $1.06.

Pre-tax, pre-provision income for the quarter was $193 million as our earnings power remains strong in the regional banking and capital markets businesses.

Before Greg and BJ give you more details about fourth quarter results, let's spend a few minutes reviewing the strategic head way that we made in 2008 and where we're headed in 2009.

Even as the operating environment became increasingly challenging, we delivered on our committment to refocus on higher return, core franchise businesses.

We exited our national lending platforms outside of Tennessee.

Most notably through the sale of our mortgage business to MetLife.

As a result, we reduced our balance sheet by $6 billion over the year, substantially reducing risk in the process.

We bolstered our already strong capital position by raising additional common equity back in April, replacing our cash dividend with stock, and participating in the TARP capital purchase program.

We improved our liquidity position as we retired about $3.5 billion of maturing bank debt through deleveraging and shifted funding to more reliable and cost effective sources, and we proactively addressed problem loans.

As the economy and the housing market weakened, we repeatedly reviewed our portfolios, regraded loans, wrote non-performers down to net realizable values, and worked hard so that our reserving models kept pace with challenging conditions.

With the actions we took throughout the year, we have built a strong foundation for the Company and we are well positioned for what is likely to be a tough operating environment through the end of 2009.

We have a strong capital base, including a tangible common equity to tangible assets ratio over 7% which we think is critical.

Our liquidity position is good and we have significant excess sources available to us.

We have loan loss reserves of nearly 4% and we have the flexibility to build reserves further if dictated by the environment.

Perhaps most importantly we have good core franchises that have meaningful competitive advantages for developing relationships with our target customers.

Those businesses remain strong in the face of a very difficult climate and are well positioned to grow when the economy rebounds.

In the regional bank, our deposits and customers are growing.

We've invested in marketing, systems enhancements and new branches opening our 50th branch in Middle, Tennessee during the fourth quarter.

Customer service remains among the best in the industry so we believe our market share and our share of wallet with target clients can move much higher.

We are aggressively pursuing new ways to become more efficient and opportunities to improve pricing to combat these adverse effects in the low rate, weaker economic environment.

Capital markets produced record earnings this quarter on record fixed income sales.

Our extensive distribution platform remains a competitive advantage and we're also benefiting from market volatility and rate movements.

Our work is not complete but we've come a long way and done it under trying conditions.

The strength at First Horizon today is a real testament to the hard work of our people and our management team.

Along those lines, I extend my thanks to Tommy Adams for serving as interim CFO over the last several months.

He has done a tremendous job while maintaining his role as Corporate Treasurer in this most unusual environment.

The balance sheet is well positioned today, thanks to his efforts.

Tommy will remain a major contributor of our finance group and our Company.

Second, it is a pleasure to welcome BJ to our team.

His solid financial services background and finance experience will be extremely valuable as we focus on our core banking and capital markets businesses during this challenging period for the financial services industry.

BJ Will be a real asset to us as we continue to refine our strategies, grow our businesses, and become more efficient.

Finally, thank you to all of our First Horizon co-workers for all they are doing to serve their customers and our communities.

In summary, we've made a lot of progress repositioning this Company, putting us on a strong footing.

Conditions will likely be very tough in 2009 and perhaps in the next year, but our Company is strong and our core businesses have compelling growth potential.

We look forward to making further progress on the path back to profitability this year.

Now, I'll turn the call over to Greg to discuss asset quality and I'll be back in a few minutes to help answer your questions.

Greg?

Thanks, Bryan, and good morning everyone.

I'll begin on slide six with an overview of asset quality during the fourth quarter.

As you know, market conditions remain very challenging.

We continue to manage our portfolio by being aggressive in loan loss recognition, continually assessing the adequacy of our reserves and remaining focused on the reduction of our discontinued national construction portfolios.

As expected net charge-offs for the fourth quarter were $191 million or 3.61% annualized compared to last quarters $155 million.

For the full year 2008 net charge-offs were $573 million, which was within our announced range of expectations.

We provisioned about $89 million in excess of net charge-offs in fourth quarter, increasing total reserve to $849 million or 3.99% of loans.

Non-performing loans increased 79 basis points link quarter to 4.91% slightly higher than the 70 basis point increase last quarter.

It's especially important to note that about half of our net charge-offs and reserve additions in 2008 were driven by our OTC and national residential CRE-portfolios and these portfolios currently represent 70% of our non-performing loans, so much of the bottom line impact of these wind down portfolios has been felt.

I'll now review our portfolios in detail starting with the home equity portfolio on slide seven.

This portfolio ended the year at $7.7 billion down slightly over the prior quarter as run-off continues to be modest in a tight credit market.

Given rising unemployment we saw deterioration in the home equity portfolio this quarter although our trends still compare favorably to the industry due to the solid underwriting and strong borrower quality in this book.

Overall, 30 plus delinquencies increased 1.97% from third quarters 1.49% with the greatest increase in our national segment.

Tennessee market conditions have been more stable than those seen nationally and we also benefit from a higher mix of first lien product which is 58% of our portfolio in our home market.

We continue to see borrower life events most predominantly job loss is the key driver of loss frequency.

In light of the softening national job market we expect home equity delinquencies to continue to rise.

Loss trends by vintage suggest that our cumulative loss estimate of 3% to 6% for this portfolio remain reasonable, again due to the quality of the underwriting and characteristics of our borrowers versus comparable portfolios elsewhere.

Next, I'll update you on our OTC portfolio on slide eight.

This book continues to wind down, balances declined $221 million linked quarter and commitments are down 61% year-to-date to less than $1.2 billion.

Charge-offs in the fourth quarter were $40 million.

Since we had increased OTC reserves meaningfully in the third quarter of 2008 to reflect the increasingly visible inherent losses in this portfolio, no provision was required this quarter and the reserve was reduced in line with charge-offs.

Upon completion of construction these loans are either moved into the secondary market, refinanced, or as a last resort taken to the permanent mortgage portfolio.

We moved approximately $100 million of completed OTC to the permanent mortgage portfolio this quarter and had a total of $417 million permanent mortgage that is a result of OTC originations on the balance sheet at the end of the year.

The remaining loss content in this portfolio is expected to be consistent with the reserve held currently of $200 million.

Moving on to residential CRE on the same slide, we reduced our residential CRE-portfolio by $192 million linked quarter, $147 million of which was a reduction in our national residential CRE wind down portfolio.

Charge-offs in the quarter were $55 million compared to third quarters $49 million.

Given that the housing market remains very weak we expect performance in the residential CRE-portfolio to remain stressed in 2009 but we will have a significantly smaller portfolio to deal within comparison to 2008.

I'll turn next to our income CRE-portfolio on slide nine, which had a balance of about $2 billion at the end of the fourth quarter.

As shown on the slide this portfolio is well diversified by collateral type and 74% of the portfolio is managed out of the core regional bank.

Additionally almost half of this portfolio relates to long term relationships in our Tennessee market where the economy has fared somewhat better than many other areas.

Importantly this is a largely stabilized portfolio that was under written to hold on our balance sheet rather than to sell in into a conduit.

In fact two-thirds of it has stabilized many permanent loans.

Fourth quarter charge-offs and income CRE were $14 million largely driven by one Tennessee credit, and income CRE-relationship in a contiguous state and LAN intended for income CRE-development in Florida.

This compares to third quarters charge-offs of $1 million.

We do expect this portfolio to see additional stress in 2009 , particularly in retail projects but also in office and industrial product types.

That being said, we think that the product mix, level of many permanent loans, geographic diversity and lack of tenant concentrations will moderate the level of deterioration realized.

Moving on to slide 10 I'll now discuss our C&I portfolio which is a $7.8 billion at the end of the fourth quarter.

The C&I portfolio is primarily Tennessee based and diverse across industry types.

We include in this portfolio our exposures to bank stock loans and our trust preferred loans against which we took a low com adjustment when they were transferred from held for sale to held to maturity several quarters ago.

The C&I portfolio continues to show pockets of stress as charge-offs were $41 million in the fourth quarter up from third quarters $31 million, mainly driven by four individual credits.

Our sense is that aggressive portfolio management and proactive risk processes implemented in the past 18 months have surfaced unique problem credits driving charge-offs in 2008.

The instance of these situations should diminish in 2009 such that losses will be driven by incremental portfolio deterioration.

While delinquency trends showed improvement in the fourth quarter dropping to 53 basis points we still expect asset quality to remain stressed in 2009 as a function of the economy.

The reserve build driven by credit grade migration reinforces this expectation; however it is important to note that this reserve build was less than in prior quarters due to some stabilization in grade migration.

As a reminder we remained aggressive on recognizing losses on non-performing loans rather than reserving for them.

Generally we apply FAS 114 process to all impaired commercial assets that are $1 million or greater, charging collateral dependent loans down to net realizable value rather than holding reserves against them for loss recognition at a later date.

As you can see on slide 11, in flows of non-performing loans related to the commercial and OTC portfolios increased slightly from the third quarter to fourth quarter.

Resolutions of non-performing loans and ORE increased somewhat as well.

As a result, NPLs increased 17% or $144 million linked quarter, similar to last quarters growth.

Since there's virtually no reasonable investor market for bulk sales, most resolutions are individual transactions but they continue to occur generally in line with carrying values.

Moving on now to slide 12, as I mentioned earlier we did increase our reserves again in the fourth quarter but the increase was the smallest in the past five quarters.

Reserve increase in fourth quarter 2008 was largely driven by three factors.

First, our home equity portfolio.

Where deteriorating delinquency trends from rising unemployment suggest a likelihood of higher losses going forward.

Second, deterioration in the performance of our small permanent mortgage portfolio combined with the depletion of low com marks taken against these loans when they were brought to the balance sheet and third, we increased our reserves due to negative grade migration in the C&I and income CRE portfolios.

Since reserves actually declined in OTC and res CRE total provision expense this quarter declined $60 million linked quarter.

Let me close on slide 13 with a review of our 2008 losses and our outlook for 2009.

As I mentioned earlier, fourth quarter net charge-offs met our expectations at $191 million and we increased our aggregate allowance to $849 million.

While predicting the future with precision is very difficult in any environment it is especially difficult given the rapidly changing economic and policy conditions we now face.

We anticipate the economic environment to remain weak through 2009.

Based on that this slide provides you a sense of how we expect our losses and our reserve to trend over the first and second halves of the year.

Losses in the national construction portfolio should remain elevated for several quarters but reserves should continue to decline since these portfolios are winding down.

We expect losses in the home equity and permanent portfolio to trend upward as unemployment rises potentially requiring additional reserves.

We expect C&I losses to increase throughout 2009 but losses in the first half of the year should be less than fourth quarter 2008 levels based on our knowledge of specific portfolio activity at this point in time.

Reserve levels should remain relatively stable.

We expect income CRE-losses to increase in the first half of 2009 but moderate later in the year.

Reserve levels should remain relatively stable in this portfolio.

In total, we expect the net charge-offs in the aggregate will remain at or increase somewhat above their current quarterly run rate during the first half of 2009, then decline to below the current run rate in the second half of the year.

As you can see, this improving outlook is the result of the interplay between various portfolios and the impact of the wind down portfolios and is certainly not based on an assumption that the economy is nearing an inflection point.

We expect to end 2009 with less reserve than we now have largely due to the reserve built for the inherent losses in the OTC portfolio in the third quarter of 2008.

Clearly, the main risk to our guidance is economic deterioration beyond what we are currently anticipating.

With that I'll turn it over to BJ to go over the financial

Thanks, Greg, and good morning, everyone.

If we could turn to slide 15 for an overview of the quarter.

As Bryan mentioned, our earnings per share were a loss of $0.27 for the fourth quarter which was an improvement over last quarters loss of about $0.61 a share.

Pre-tax pre-provision income was at $193 million, an increase of $67 million link quarter, favorably impacted by outstanding fixed income results in our core capital markets business as well as about $34 million of significant items, which I'll detail a bit more for you in just a minute.

Also of note, tangible book value ended the quarter at $10.98 on a slightly higher share count of $206 million.

Turn with me to page 16.

As mentioned here is a quick summary of significant items for the quarter.

First, in our mortgage business, we increased our reserve for our captive reinsurance this quarter to account for increased loss expectations in light of market conditions.

We've also adjusted down the value in our mortgage warehouse by about $15 million.

Third, we had $10 million in expense from our ongoing efficiency and restructuring efforts, including the early exit of a sponsorship deal in one of our former National Banking markets which will save us money over time.

Fourth, as a result of Visa funding and escrow in the fourth quarter we recorded a $11 million reversal of our Visa liability accrual through non-interest expense.

Lastly, we generated net mortgage MSR hedging gains of $65 million as falling rates and a steeper yield curve combine with changes in our convexity profile of the servicing portfolio benefited our hedge position.

As a note, we continue to strive to set the valuation of our MSR to reflect market conditions and our carrying value remains just below comparable peer median.

Turning to the balance sheet trends on the next slide, we reduced assets in our balance sheet by $1.8 billion in the fourth quarter as our national loan portfolios and mortgage servicing assets continued to wind down, slightly offset by a small increase in our investment portfolio.

Since last year, we have reduced our balance sheet by $6 billion and significantly reduced our mix of real estate loans.

With continued run-off at our national lending portfolios more than offsetting expected new loan production, we do expect further reduction in our total loans in 2009.

In addition, we will have run-off in our mortgage servicing portfolio and we also anticipate opportunities to sell servicing in bulk, much as we did in 2008.

In total, we expect assets to decline another $1 billion to $2 billion this year.

Fourth quarters net interest margin was 296 basis points, a link quarter decline of about five basis points.

The compression here was driven primarily by three factors--First, an ongoing competitive deposit pricing environment, second, asset sensitivity in the bank against rapidly falling short-term rates, and third, as a result of the disruption in the Fed funds market and excess liquidity, we maintained unusually high balances at the Fed during the fourth quarter.

Now in earning assets since we received interest on these balances, these low-yielding reserve to loan lowered our margin by roughly seven basis points in the quarter.

In the short term, our margin should remain under pressure given the low rate environment and practical limitations on core deposit rates.

Over the long term, however as we continue to reduce our lower margin national businesses and assuming market conditions normalize at some point, demand should expand.

Taking a look at liquidity sources on the next page, page 18, as a result of core deposit growth and deleveraging, liquidity continues to improve.

Core deposits were up $550 million link quarter.

We retired another $1.5 billion maturing bank debt in the fourth quarter.

We should also of note be able to cover approximately $1 billion more in 2009 maturities through balance sheet contraction of loan and in light of both asset reductions and growth in core deposits in the quarter our sources of excess liquidity improved to over $5 billion, and we have and we will continue to shift wholesale funding away from less reliable credit sensitive sources through the rest of 2009.

Moving on to capital, on slide 19.

As you know, we sold $866 million of preferred stock in warrants to the Treasury in the quarter as part of the CPP program, again improving our capital position.

We've shown in our financial supplement where the CPP flows through the balance sheet as well as where the dividend and warrant accretion of the preferred stock to its par value will be recognized in the P&L in subsequent quarters.

The amount of preferred equity is $783 million which will increase each quarter.

The common equity created by the warrants is $84 million and the reduction in net income available to common shareholders caused by the preferred dividends and amortization will be roughly $15 million each quarter for the next five quarters, starting in the first quarter of 2009.

With our continued balance sheet reduction and the CPP, our capital ratios improved again in the fourth quarter, all to levels that keep us among the best in the industry.

Tier 1 at the end of the year at 14.9%, total capital was over 20% and tangible common equity of tangible assets was 7.3%.

Given the writedowns we've already taken on our NPLs, significant loss reserves and our pre-provision earnings capabilities, our stress analyses continued to indicate that we can withstand even a severe recession with a comfortable cushion well above well capitalized standards.

On slide 20, let me spend a minute on how we're using the TARP capital.

We take the responsibility associated with this investment very seriously, with an even stronger capital position, we've begun leveraging the Treasury funds through prudent business and consumer lending in our core banking franchise.

We're able to support commercial customers with their credit needs while maintaining consistent standards of credit worthiness.

We've also begun investing in infrastructure and productivity efforts to increase our lending capacity going forward and extend banking services to the communities that we serve.

Now let's move on and discuss the business segment performance highlights starting with regional banking on slide 21.

Customer trends improved in the fourth quarter as third quarters market turmoil subsided and our customer outreach efforts continued to pay off.

Period end core deposits increased $459 million link quarter while loans were slightly up link quarter as demand remains fairly muted.

Pre-provision earnings in the regional bank declined $20 million link quarter driven by environmental impacts on revenue.

On the fee income side, fee income declined link quarter as weak consumer confidence pressured our wealth and deposit fees and on the NII side, that decreased due to a 21 basis point contraction in a net interest margin as our deposit pricing remained unusually competitive and short-term rates dropped.

We are seeing opportunities, however, to improve new loan pricing and believe this will be the new paradigm going forward, ultimately paving the way towards improved margins.

Expenses in the regional bank increased by $9 million link quarter driven mainly by environmental items like increased foreclosure costs, investments and infrastructure retained following the divestiture of our national platforms.

Let me note here that we're not at all satisfied with this area.

We're aggressively working to optimize our cost structure to right size the expense base, help offset uncontrollable short-term market impacts, and make us more productive in the long run.

Provision in the regional bank remained elevated at $106 million as we continue to proactively update loan grades, in terms of outlook, shorter term regional bank earnings will continue to be adversely impacted by the difficult economic and operating environment but the good core fundamental trends in terms of customer growth along with opportunities for both revenue growth and expense efficiency tell us there's an attractive upside in this business when the economy turns.

Moving on to slide 22, as mentioned in my opening comments, the capital market segment performed very well in the fourth quarter as the fixed income business produced a record $157 million in revenues.

As a result, pre-tax pre-provision earnings in the business increased to $83 million on positive operating leverage of a well managed fixed cost base.

After accounting for provision expense of $8 million which declined link quarter, capital markets produced pre-tax income of $74 million, the best quarter we believe ever in the 80 year history of the business.

Going forward we expect capital markets earnings power to remain strong, although the magnitude and duration of the current elevated performance level is difficult to predict.

Turning to slide 23 in summary, as 2009 progresses we're likely to face both unusual headwinds and benefits of a weak economic environment as we did this quarter.

We expect these will abate in time providing improved visibility into our bottom line earnings capability.

We'll continue to focus on controlling the controllables, growing business with our targeted customer segments, delivering good customer service, improving productivity, pricing with discipline and driving further expense efficiency across all of our businesses.

To sum it up, I'm excited to be part of First Horizon.

I've been impressed with our management team and our people and the actions they've taken to build a strong Company which is prepared for the current challenges and we're poised to take advantage of opportunities going forward.

I look forward to working with the team to improve our performance even further.

In addition, I also look forward to meeting our shareholders, our analysts and other members of the investment community over the coming weeks.

Thanks and now we'll be happy to take your questions.

(Operator Instructions) We'll take our first question from Steven Alexopoulos with JPMorgan.

Hi, good morning everyone.

Good morning.

Good morning, Steven.

Greg, can you clarify, is your credit outlook suggesting you're going to match provision to charge-offs in the first half of the year?

Is that what you're saying?

Steve, this is Bryan, and I'll let Greg expand on it.

He walked through a fair amount of detail by portfolio and some portfolios we're likely to build reserves over the course of the first part of the year and other portfolios like the one-time clause portfolio and the residential CRE we expect that those will come down.

I think what Greg tried to signal is that over the course of 2009, we would expect that the level of reserves would come down particularly as we finish working through the one-time close and the home builder portfolios and realize those losses.

Yes, I think that's right.

I think we have pretty good degree of confidence and provision expense will, the impact of having reserve for the OTC losses in Q3 will allow some provision release and we feel that on the home equity portfolio and the commercial portfolios are the ones where there's a potential for increase that may or may not offset that release we get from OTC, depending on what we experience in the environment.

If the portfolio gets worse and the migration increases and that migration has slowed on the commercial side, we should be fine on commercial but we are vulnerable there and we're further vulnerable to additional deterioration and delinquency in home equity quarter to quarter.

Okay.

Maybe I could just follow-up on that.

When we look at the charge-offs and C&I and income CRE, they were both up this quarter.

When you think through 2009 for loss content there, which of those do you think could be more of a pressure point?

I think in terms of absolute dollars, C&I because the portfolio is so much larger for us.

It's two or three times the size of our income CRE-book.

What about loss rate?

I think what we see is income CRE, that cycle following res CRE is furthest along through the portfolio, so we expect I think we're communicating that we would have income CRE losses elevated in the first half and moderate in the second half.

On the C&I side, we see more of a steady build and deterioration through the year, but we do expect to start the first half of the year in a better position than we were in the fourth quarter because a lot of the portfolio management activities we instituted over the past 15 months flushed out a number of issues that we dealt with we think pretty effectively in 2008.

Maybe just one quick final question.

Bryan, 2008 clearly a transition year.

What's your best guess when we actually turn the corner and you guys are profitable on the bottom line?

Well, Steve, that's a hard one.

The question really is going to be mostly driven by how credit performs and how the economy around us performs.

I think we've taken a lot of significant steps in the last 15 months in this transition year as you suggested to position the business.

We've been very aggressive in identifying credit.

We've built strong reserves.

I'm optimistic today that we'll start to see the turning economy and turning credit in the latter half of 2009 and with that, I think we can return to profitability.

So I think the key driver is going to be your outlook on credit and with the movement in the economy in the last 90 days, it's really hard to pinpoint exactly when that turn will be, whether that's late 2009, early 2010.

Perfect.

Thank you.

Sure thing.

Thank you.

We'll take our next question from Ken Zerbe with Morgan Stanley.

Good morning.

I was hoping you could provide a little more color on the Tennessee market or your regional banking.

We've just had such a sharp deterioration in this level of provision expenses that are due to commercial deterioration, and again, maybe drill down a little bit more on what exactly are you seeing on the commercial side.

Is this broad based throughout the entire market?

Is it specific loan types, borrower types that you're seeing deterioration at?

Thanks.

Ken, this is Greg.

I'll take that.

I think the short answer on C&I deterioration is it's pretty broad based.

I think going back to what we, and the reason the provision expense build is in the regional bank is because that's where a majority of our C&I assets are and that's where the most recent deterioration third and fourth quarter has occurred.

With respect to the experience we had in '08, the drivers of losses in C&I were housing related businesses.

Occasionally they were deals that were maybe underwritten to pro forma cash flow when there was a lot of non-bank money chasing those sorts of deals two or three years ago and then a real driver for us were more business banking/commercial customers that, whose principles had diversified into real estate, particularly Florida real estate and those losses impacted their business pretty substantially so it's a bit of an anomaly for '08, going into '09 the deterioration is pretty broad based.

And just on that, I think it was slide 13 that said that you expect C&I losses I guess had an arrow going across or no, it was going down, so just to be clear, you expect it -- was it that you expect C&I losses to actually go down from fourth quarter levels but still be above 2008?

And I guess if the economy is going to such recession which it is, why would C&I actually go down to flat going forward?

That's a good question.

I think when you think about 2009, our view is that we're going to see pretty steady deterioration in C&I performance throughout the year, so sort of a steady increase quarter to quarter.

Our starting point in '09 will be lower in our view due to a lot of the intense portfolio actions we took in 2008 uncovering latent problems in the portfolio and dealing aggressively with those problems, and based on our knowledge of the portfolio, what's in a watch or worse status right now.

We have a pretty good view on at least kind of the inventory of potential problems going into '09 and that view would indicate a lower level of losses than we saw in Q4 of '08.

Okay, great.

Thank you very much.

We'll take our next question from Tony Davis with Stifel Nicolaus.

Good morning, everyone.

I guess Greg, for you, can you give us a little more color on loss severity today in home equity versus say back in August, September?

Particularly what you're seeing again between first and second lien and the contrast too between end market and international market?

Sure, Tony.

In terms of loss severity, on home equity second lien, it's been really our policy since May to bias towards charging off rather than charging down.

In other words, we assume in virtually every case 100% severity to go ahead and charge off and have any recoveries after the fact and that's just because of it just wasn't proving to work to foreclose out and try to obtain that equity.

It cost you too much to do that so that picture hasn't changed.

The severities on first lien, I don't think have moved much since third quarter and do we still have that?

I think we might still have that in an appendix slide, Dave?

I think so.

My recollection is it's obviously significantly lower, maybe 40% or something like that.

Okay.

Did you mention the one-time close and home builder loans volumes that were sold in the quarter and kind of what your expectations are in terms of what you might be able to do this year on that front?

Just to be clear, Tony, are you asking about OTC being able to sell the completed loans into the secondary market?

Or troubled asset disposition?

Yes.

Which one?

The disposition, yes.

Troubled asset disposition?

Yes.

I guess a general comment on residential CRE which is home builder and OTC, we went into the quarter with a focus on moving beyond transactional dispositions and into more bulk sales but as most of you know, that market was very tough in Q4.

The market for asset sales because of the level of uncertainty out there, investors have pretty much pulled to the sidelines.

When we do dispose of troubled assets, we are, we continue to realize about what we've got them marked down to so we do continue to have transaction by transaction disposal, about our NRVs.

That answer your question, Tony?

We'll take our next question from Heather Wolf with Banc of America.

Hi, good morning.

Good morning, Heather.

Just a couple of questions on both the banking segments.

In the retail bank, I appreciate that you guys are looking to bring your expenses down a little bit there.

I'm wondering if you can just address how much of the expense increase is related to credit management?

This is B.J., Heather.

I think if we look at the expense increase in the regional bank link quarter it's about $9 million.

I would say that roughly half of it was related to those environmental factors we talked about in foreclosure and so on with roughly the other half or so in some infrastructure things.

Got it.

Okay, and then just in the national specialty lending, I know you had addressed the margin issues on a consolidated basis, but in that division, I thought that we were going to see some margin improvement as some of these more toxic credits rolled off.

Can you sort of address that going forward?

Hi, Heather, it's Dave.

I don't know that you would or wouldn't necessarily and there's also some interplay between the segments and then what shows up in corporate because so much of that national specialty lending segment is funded effectively with wholesale funding but you also during the quarter saw the impacts of the drop in rates on the home equity portfolio which actually I think based on the way the loans reprice they reprice to the previous statement dates so it actually has an adverse effect on the margin so I think that's what you're seeing there.

Okay.

Thanks a lot guys.

Thanks Heather.

We'll take our next question from Bob Patten with Morgan Keegan.

Hi, guys.

Hi, Bob.

I guess three questions.

First two for Greg.

Can you just give us a quick update on the Correspondent portfolios and the Trumps portfolios, where you think they are in terms of performance?

Also big picture, Greg.

If you could address how management is looking at the potential cram down legislation that may or may not get done and how that's going to be impacted, how do you deal with that in terms of strategically planning the Company?

And then Bryan, a question for bank M&A.

Are you, with your capital positions and where you guys are now at this point, anticipating that the FDIC is going to become more aggressive at encouraging transactions both small and mid caps?

Greg, do you want to start?

I'll start on correspondent, Bob, which is our loans to banks, bank stock loans.

That portfolio continues to be stressed, particularly banks that are heavy real estate.

We feel good in general about that portfolio in terms of the majority of the banks out there.

I think the TARP is helping.

We do pay a lot of attention to that portfolio on a quarterly basis in terms of making sure it gets regraded and then we have th proper reserves against it.

We did have less provision build in correspondent banking as BJ pointed out in fourth quarter than we did in third quarter.

Mortgage cram down.

Mortgage cram down?

We're walking through that.

We're, as you know, primarily a second lien holder so we're trying to sort through the impacts on second lien holders of that legislation, as you also know, we are at about 100% severity and most of our at risk home equity portfolio, not at risk but national portfolio, the majority of that is second lien and therefore, we're already assuming 100% severity, so what we're really focused on is the impact on frequency, how many more potentially issues that would drive in terms of events of default.

There's a couple schools of thought that it might drive events down because there would be an incentive to avoid bankruptcy and more of an emphasis on loan modifications but I guess time will tell on how that works out.

Greg, there's some speculation back and fourth, the way I'm understanding it is that if a borrower were to take a cram down they would have to file bankruptcy.

Is that true?

The way I read it, Bob, is this comes into play when it's in front of the judge so it would have to be in bankruptcy.

And you have to try to negotiate at least to some extent prior to getting in front of the judge.

Okay.

And Bryan your question?

Thank you.

The M&A environment is sort of murky right now.

I wouldn't presume to prognosticate what the FDIC may do, but my guess is there's going to be more activity in 2009 than there was in 2008.

We would be very interested in things that fit in our footprint and our marketplace if we had the opportunity to participate in an FDIC transaction and so but day-to-day, we're working very hard on managing through credit, being prepared for what is an otherwise tough economy, and so as we focus day-to-day, it's working through the challenges that the economy has presented in terms of some of these residential construction portfolios and repositioning our business over the longer term eye of being in a position to grow our market share as we have opportunities that present themselves.

So in the short run I don't know exactly what will happen but I do believe our focus is best spent today focusing on working through this economic environment and being in a position to participate in the convergence of the business long term when the economy turns better.

Okay, great.

Thanks, Bryan.

Sure thing, Bob.

We'll go next to Paul Miller with FBR Capital Markets.

Yeah, thank you very much.

You did very well on the capital market side of the business and you said that that's going to be probably decent going forward.

Can you give us some color on where is that revenue exactly coming from and then what type of volatility?

I know you say it's not going to be exactly that number but are you talking about like 20% volatility, 40% volatility on that line item?

I'm just trying to use it how to model this.

Paul, this is Bryan.

The capital markets business has been most recently driven by very strong fixed income sales activity.

As you know, the marketplace in terms of competitors in the fixed income businesses has gone through a lot of change.

There's been a lot of volatility in the fixed income capital markets.

Our platform is very well positioned for a market like this.

We have used this opportunity to really step up and make a market and liquidity in fixed income security.

We have a national business and it has been a very strong business and a great opportunity for us to grow it.

While revenues have been strong in the fourth quarter and have started off to be very strong in the first quarter of this year, we recognize that that can ebb-and-flow depending on what's happening in the fixed income markets, so it's almost impossible to sign a volatility to that individual line item but we expect it will be strong for awhile.

We expect over time, that volumes will moderate but we think they will stay at a somewhat higher level and because we think we have consolidated some shares as a number of competitors in our marketplace are no longer in that marketplace and we've had an opportunity to increase our share and grow our level of business with our customer base.

Now, correct me if I'm wrong that a couple years, I mean you guys were really strong in the Trump business and whatnot and I haven't seen that business really come also back.

What type of fixed income securities are you guys really picking up share on, or is it the Trumps?

Well, the Trump business has almost been non-existent since the really, the middle, it started declining in the middle of 2007 and I think our last transaction was in 2008.

We still make a market in certain securities but there's not really been any underwriting.

We've got a full service fixed income division.

We have a very strong agency business.

But we service the entire gamut of needs from corporates to agency securities and so it's really a sales and trading activity where we help our customers manage their balance sheet needs and we facilitate buyers and sellers in various fixed income securities.

We'll take our next question from Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Good morning Kevin.

Two quick questions.

Number one, the tangible common equity, the tangible asset ratio, notwithstanding the improvement of regulatory capital but that ratio is probably going to be increasingly scrutinized and you guys did take it up this quarter and I'm just curious, Bryan, with all your projections on the balance sheet and still coming in and looking at the margin, looking at it expensively, looking at credit, what's your best guess, what's your goal for that ratio looking out into year-end 2009?

And then second, talking about expenses, I know a big driver of the increase was foreclosure costs.

How should we think about FDIC premiums in the run rate of expenses, specifically I think that's going to go up starting in first quarter '09 and then maybe even more in second quarter '09 and if you can give us some kind of guidance or just a ballpark on where that is on a quarterly basis and where that might go to?

Thanks.

Okay.

I'm going to let Tommy answer the FDIC insurance question first because he spends most of the time with it and then we'll start on capital and I'll follow-up.

All right on the FDIC insurance costs I think we're talking about $10 million for us on an annualized run rate basis.

Yes.

That it is now or that it will go to?

That it will be on a run rate basis in 2009.

And is that already baked in or is that going to jump up considerably from where it is right now?

Well, it will be higher in 2009 than it was in 2008 because of the expanded coverage.

Right.

Okay.

Tangible capital ratios, we're at 7.3%.

We expect that the balance sheet to come down close to another couple billion dollars in the course of 2009.

We expect that that capital ratio will continue to grow.

I don't, today, sit around and worry about having too much tangible capital.

I think that ratio being strong and growing is a good thing and so clearly we want to keep it north of the 7% ratio and we expect it to move towards 7.5 to 8 as we continue to reduce the size of that balance sheet, so we don't have a specific target because I think the flexibility required in this economic environment says when you have the opportunity to improve your capital ratios you do so.

One last question, Bryan.

If the capital markets unit is really on a high right now, and it's doing well due to the fixed income results and you expect it will continue to do well, long term when you look out, is there, do you really look at that business as being, there being a strong fit within a core Tennessee based regional bank as you guys have, that's your end game or is it a possible option while that business is doing well to look to sell it and why or why not?

Well, one of the comments that I started to make in my opening comments was that they just had the best quarter in their 80 year history so that's a business we've been in for an awful long time and that's been a core business for us.

It's been a stable business.

It doesn't require a tremendous amount of capital committment from us and if you focus on what the capital markets team, Frank Gusmus and Mike Modello and the entire team have done over the last year they've reduced the size of their trading inventories, they've reduced the amount of capital committed to the business and drove in greater profitability out of the business so I'm very pleased with how that business is performing.

I'm pleased with the progress that we've made there.

I think we're positioned well.

I think it's an important business so no, I don't anticipate that we would be interested in doing anything with it.

We'll take our next question from Adam Barkstrom with Sterne Agee.

Hi, everybody.

Good morning.

Good morning, Adam.

Wanted to follow-up on one thing and you guys may have talked about this specifically in your opening comments, but Bryan, a second ago you just mentioned the TCE levels potentially continuing to go up especially with the balance sheet deleveraging going forward.

From here, let's say another way in 2008 you guys laid out some fairly specific goals as far as deleveraging and you pretty much hit those goals.

I guess from here, how much more do you think we would expect in balance sheet deleveraging?

Adam?

In broad terms, probably a couple billion dollars of deleveraging, a fair amount of that will come out of the one-time close and the home builder portfolios which today on a national basis are still at 1.7 billion, $1.8 billion range.

So in the aggregate I would guess something in the $2 billion plus or minus range.

Okay.

So that's roughly on a $31 billion balance sheet, percentage wise that's going to be 6, 7% reduction in the balance sheet.

Okay.

I guess flipping around the other side, it was mentioned certainly in your released remarks but maybe not quite as focused on but maybe give us some more color.

You mentioned $900 million of loan growth this quarter.

Yes.

Could you take a minute and give us some more color on what areas, what industries, some more detail on that?

Yes.

Let me be clear.

What BJ referred to was $900 million of new lending and what we were reporting was progress that we've made in the TARP, as BJ pointed out we have taken our responsibilities there very seriously and we are focused on new lending and in round numbers we had about a little over $150 million in new consumer lending, about $90 million additional mortgage lending and then probably 500 million, $600 million in additional commercial real estate lending throughout the franchise.

So what we're trying to point out is it's not net loan growth of $900 million but we did in our footprint put new loans on the books to meet the needs of our communities and serve our customer base.

We'll take our next question from Christopher Marinac with FIG Partners.

Thanks, good morning.

I was curious about slide number 18 on liquidity.

The change from the FHLB debt to the (inaudible) debt, was that done purely because of interest rate or was there another rationale or another flexibility that the FRB gives you?

Christopher, this is Tommy Adams.

That was done primarily because of a rate differential.

It's a different collateral margin was the second consideration and also, we had faster than forecasted deleveraging of the construction loan portfolios and greater deposit growth than we had forecasted during the quarter.

So all of those things allowed us to increase our liquidity over the course of the quarter and the Home Loan Bank advances were our highest cost of funds at the time and that's what we would pay.

So you would revisit the FHLB debt if necessary?

If there's nothing wrong with it.

Certainly.

That was that.

Great.

And Bryan just to follow-up on Bob's question earlier about M&A, do you have any ideas in mind in terms of the footprint and how you'd like to see it evolve in the next couple years outside of Tennessee if at all?

Yes, Chris.

The footprint around -- Tennessee is an interesting state in just the sheer number of states that touch Tennessee.

There's a lot of geography around us that will look and feel very much like our Tennessee markets where we've been so very successful and so we think there are a lot of opportunities for us to expand over time.

I would expect that as we continue to grow this business and as the economy improves we'll see opportunities on principally our Eastern and Southern sides of the states around Tennessee and those markets as I just said will look very much like the Chattanoogas and the Knoxvilles and the Nashvilles and the Memphises where we've been so very successful and been able to build a customer service model, a density of branch network and a market share that gives us the ability to compete with very advantaged capabilities.

So yes, I think there's going to be a lot of opportunity but going back to what I said in response to Bob's question, our focus today is continuing to reposition the business, continuing to work through what we think will be a difficult economy, to continue to serve the markets that we're in today, and position ourselves long term with the infrastructure and the systems and the processes that will make us advantage and allow us to take advantage of the things I just described for you.

We'll take our next question from Steve Covington with Stieven Capital.

Good morning guys.

Just a couple quick questions.

On the deposit side you mentioned your pretty strong growth in the transaction account area, can you talk a little bit about what that was driven by or is there anything unusual in there and would you expect that to continue?

Steven, it is Tommy Adams again.

Yes, we did enjoy good deposit growth over the course of the quarter.

Two primary drivers there.

We had some very successful savings program promotions during the quarter that brought in probably $250 million to $300 million worth of new money and then we also had a build up in our custodial deposits relative to the third quarter.

The custodials are associated with the mortgage servicing rights we own.

Will those run out then in the first quarter you think?

That's seasonal.

We will actually probably see in the custodial a build up because of more refinancings of existing mortgages and actually during the fourth quarter a lot of the custodials go out to pay property taxes so we'll see a build up in that.

Okay.

And then secondly, I noticed you did some debt buybacks during the quarter and created a little capital and I'm just wondering, is that something you have the ability to continue to do and even get a little bit more aggressive?

Yes.

We actually had muted activity in the fourth quarter compared to the prior two quarters but the answer is yes, we do look to buy our debt back at a discount.

We didn't see much in the broker markets during the fourth quarter, so our activity was muted as a result.

I think gains in the second and third quarter, 15 million to $18 million, $3.5 million or so in the fourth quarter.

Right.

We just try to be opportunistic there.

We'll go next to Jefferson Harrelson with KBW.

Thanks, guys.

Brian this is kind of far in the future, but the market seems to be looking at TARP money as increasingly temporary.

Are you guys, how are you thinking about strategically repaying TARP?

Are you thinking common or preferred or just kind of waiting the full five years because it's a good rate or how should we think about, or how are you guys thinking about repaying it and how temporary versus permanent the capital is?

Yes, Jefferson, good morning.

This environment that we're in today sort of makes it hard to think that far out.

But as you know, for the first three years to pay it back in the first three years, you have to raise qualifying capital to replace it from year three to year five before the step up in rates, you have the ability then to repay it.

I think a lot will depend on what happens with the overall economy and as we sit here today I mentioned earlier, our capital position was tangible, was it 7.3%, that's likely to improve as we continue to reduce the size of these national non-essential businesses.

Our Tier 1 ratio is just a hair under 15% which in more normalized times would be extraordinarily high, so you can come up with a number of different scenarios about what you believe about the economy and how the balance sheet will change but if you assume that we continue just to push through there's a possibility that we wouldn't need that additional Tier 1 capital and then to the extent that the economy gets much more severe, we have other need for it we would look at all of the things that you just considered and some point make a decision on how we would replace it, so today it's very well priced and timely capital.

We think it's a good thing for the system.

We're happy to be participating in the program, and we're starting to think about that but that's way down the road at this point.

All right and you kind of touched on a lot of these things.

Maybe this might be summarizing a little bit but is it fair to say that your expectations of cumulative loss rates within all your portfolios that maybe the riskier portfolios, the already identified portfolios they probably didn't change much this quarter but maybe the C&I and CRE the expectations got a little worse there and that maybe in total if you had to over the last 90 days think about the change internally of thinking about cumulative losses that may have increased a bit over the last 90 days or is that--?

Yes, Jefferson, this is Bryan.

I'll start and then I'll let Greg sort of pick up.

We've laid out ranges of losses and some of them tended to be a little wider than others just because of the imprecision.

Clearly with the softness that we've seen in the economy and we think the softness that's going into 2009 that we're moving higher in those ranges of losses.

We still feel pretty good about the generalized ranges, probably towards the higher end of some of them but a lot of it is going to be affected by or depend on how long and deep the duration of the recession is so yes, on margin I would say yes, we think cumulative losses have gone up a little bit in the last 90 days and as a result of softness in the fourth quarter and what we think going into the first.

Greg?

Yes, Bryan, I think you're right on.

We think about the OTC and res CRE portfolios, we think we're in a more mature point in the cycle in res CRE and I think we've got senses around OTC.

Just naturally in the economy, the income CRE-portfolio is cycling behind res CRE and C&I is a little bit behind that so that's where the reserve build has occurred because the great migration has shifted down but also important to note that the reserve build on those portfolios was higher in third quarter than fourth quarter, so we have seen some moderation in the level of deterioration over the quarter.

Ladies and gentlemen, that does conclude today's question and answer session.

I'd like to turn the conference back over to Mr.

Jordan for any additional or closing remarks.

We want to thank you for joining us.

We know this is a busy morning.

We thought we picked a quiet Friday morning to release earnings.

We're pleased with how we're positioned.

We're pleased with the continued progress that we've made in repositioning the business.

Please feel free if there's any other information that we can help you with or reach out to Dave or to Arty throughout the course of the day.

Thank you again for joining us.

Have a great day and a great weekend.

Ladies and gentlemen, that does conclude today's conference.

We appreciate your participation.

You may disconnect at this time.