First Horizon Corp (FHN) 2009 Q1 法說會逐字稿

Welcome to First Horizon National Corporation's first 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 listen-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 will use this morning, are posted in the Investor Relations section of our website at www.fhnc.com.

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

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, or in a footnote 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 and our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan, our Chief Credit Officer, Greg Olivier, and our CFO, BJ Losch.

We also have here our Treasurer, Tommy Adams, who will join us for the Q&A session.

With that, I will turn it over to Bryan.

Thank you, Dave.

Good morning, and thanks for joining our call.

On slide three, first quarter's results reflect significant continued progress in our businesses, as well as our ongoing bias towards proactively recognizing losses, and aggressively reserving for economic deterioration.

As we refocus our strategy on being a strong regional financial services company, our core businesses show solid performance, in many ways better than expected.

First quarter 2009 showed that our actions over 2008 combined with our fundamental competitive advantages, are benefiting our regional banking and capital markets franchise.

In terms of the numbers, pretax pre-provision income was $187 million for the quarter.

We did build the reserves significantly again, and of course, we had the full impact of the CPP preferred this quarter.

As a result, earnings per share were a loss of $0.39, and net income available to common shareholders was a loss of $83 million.

We continue to make substantial progress in positioning First Horizon to withstand near term challenges, while ensuring we can take advantage of long-term opportunities.

Here is an overview on slide four of what we accomplished in the first quarter.

We continue to de-risk our balance sheet through the wind-down of our national businesses.

Our national construction and consumer portfolios continued to run off, and we completed a bulk sale of mortgage servicing just after quarter end.

We remain proactive on asset quality, growth in nonperforming loans slowed to 8% in the first quarter, the slowest rate in two years.

While the economy continues to soften, we think that our hard work over the past 18 months around improving our processes for problem loan identification is paying off.

Net charge-offs during the quarter were in-line with expectations at $208 million.

Since economic conditions remain challenging, we continue our focus on building appropriate reserves for inherent loan losses.

Our capital and liquidity positions remain strong.

Our capital ratios remain industry-leading, with Tier 1 at 15%, and TCE to TA, tangible assets, at 7.1%.

Based on our stress testing, we continue to believe our capital position is sufficient to withstand even severe levels of credit losses, if the economic environment worsens significantly.

Liquidity is improving as well.

As we downsize our national balance sheet and deposits continue to build at a pace not seen in several years, we have been able to retire maturing debt, and maintain significant excess liquidity.

And finally, we continue to develop our core businesses, where we see attractive opportunities for growth, combined with good returns.

Customer trends in our regional bank remain good as core deposits increase 3% linked quarter, driven by expanded consumer and business relationships in our Tennessee market.

Our capital markets business performed well, as fixed income drove another record quarter with revenues of $240 million.

As a regional firm, with strong distribution capabilities, we have a real competitive advantage.

Favorable market conditions, specifically high volatility and tight liquidity, are also benefiting the capital markets business.

Moving to slide five, given our strong capital position, we consider it an ongoing responsibility to support our core banking markets, by extending credit to consumers and businesses.

We did just that again in the first quarter, with new and renewed lending commitments to consumers and businesses in the communities we serve.

We are also transforming how we do business, to enhance our capacity to make new loans going forward.

In summary, we expect that weakness in the economy will persist, with unemployment rising and housing prices likely falling further.

First Horizon is well-positioned for these conditions.

We have built a strong balance sheet with capital and loan loss reserves that are among the best in the industry.

We have great core franchises that are allowing us to generate good pre-provision earnings.

Our efforts to reposition our business are on track.

We are making a great deal of progress in managing our problem loans.

We have identified significant cost savings opportunities which we are implementing, and we continue to make good progress in growing our core businesses.

Short-term margin compression, elevated credit costs, and other environmental factors may currently mask our long-term earnings capability, yet I am confident, confident that the steps we are taking, and the progress we are making, are positioning us very well for the future.

We have work left to complete, resolving problem assets, reducing costs, and enhancing our capabilities, but I believe that our patience and persistence will be reflected in a much stronger Company.

With that, I will turn the call over to Greg, who will discuss credit trends, then BJ will review the quarter's financial results.

Greg.

Thank you, Bryan.

I will begin my section on slide seven with an overview of asset quality for the quarter.

Net charge-offs came in as expected at $208 million, or annualized, 3.97% of loans.

While charge-offs increased $17 million linked quarter, this increase was the smallest since second quarter 2007.

Total provision expense was $300 million, which increased reserves $941 million, or 4.6% of loans.

Our expectation had been that reserve levels would be flat to fourth quarter levels in the first half of the year.

While we are generally tracking with expectations on the home equity, permanent mortgage portfolio, and the residential pre book, we realized $30 million less in reserve reduction than was anticipated on the OTC portfolio, after our most recent assessment of the remaining inherent loss.

And we had a $35 million increase overall in the commercial reserve.

As you can see from the bottom of the slide here, our rate of NPL growth slowed to 8%, the lowest rate of increase in eight quarters, as the amount of inflows decreased.

The deceleration in NPL growth is attributable to the wind-down nature of the national real-estate portfolios, and the proactive efforts of the past 18 months, to identify problem loans aggressively.

Note that 73% of our existing nonperforming loans originated in the national residential CRE and OTC portfolios.

In aggregate NPLs were 5.44% at quarter end.

Despite our outlook for weak ongoing economic conditions for 2009, we expect only modest NPL growth going forward, perhaps declining in the latter half of 2009, or early 2010.

I would note that our loans past due 90 days and greater were up from last quarter, driven primarily by our commercial portfolios.

All of the 90 plus accounts were approved to be carried in accrual status as resolutions were anticipated within 30 days.

The majority of these accounts have subsequently been resolved.

Next, we will review key trends by portfolio beginning with the home equity on slide eight.

Our home equity portfolio totaled $7.6 billion in outstandings, with $4.9 billion in our national market, and $2.7 billion in our core Tennessee market.

As expected from delinquency trends observed in the second half of 2008, charge-offs in the home equity portfolio were up $11 million in the first quarter, to $46 million compared to fourth quarter's $35 million.

Delinquency continued to increase somewhat in the portfolio through January, then stabilized in February and the balance of the first quarter.

Given an economic outlook of rising unemployment and softening home prices, and the roll forward of an increased level of delinquent dollars from late fourth quarter and early first quarter, we increased reserves on the home equity portfolio consistent with our expectations.

There are a couple of favorable dynamics developing for this portfolio.

First, the indications of seasonality and delinquency could offset some of the stress on the portfolio from economic conditions for the next several months, and second, recall that much of our portfolio is comprised of older vintage loans, with 50% originated in 2005 and earlier.

This is important since it a significant portion of our current losses are coming from the vintage years 2005 and 2006.

As losses tend to peak between 24 and 36 months, these vintages should experience their highest loss rates during 2009, with loss rates expected to decrease meaningfully in 2010 and subsequent years.

We believe the reserve build is prudent, and at the same time we continue to feel good about the relative performance of this portfolio.

Borrower quality is good as 86% of the portfolio is retail originated, and our refreshed average FICO score is 730.

As a result, many of these borrowers have continued good access to credit, and are able to take advantage of refinance opportunities.

The good news here is that our wind-down national portfolio declined approximately $200 million in the first quarter, as annual prepaid speeds picked up meaningfully.

All of this tells that us that our cumulative loss estimate of 3 to 6% of this portfolio remains reasonable.

Turning to slide nine, the one-time closed portfolio continues to wind down, with balances decreasing $200 million, or 21% from last quarter.

Charge-offs for the quarter were in-line with expectations at $47 million.

However, our assessment of remaining loss content in this portfolio was revised upwards by $30 million to $183 million.

The reserve now represents 24% of loans.

Our $1.1 billion permanent mortgage portfolio contains a variety of residential mortgages, including OTC and other mortgages that were originally intended for sale, but became unsalable when the secondary market froze.

Charge-offs totaled $10 million in this portfolio in the first quarter.

We expect incremental deterioration in this portfolio, and will likely build reserves further as we did this quarter.

Next, I will move on to our commercial real estate portfolios on slide 10.

Looking first at residential CRE, charge-offs were $56 million, in-line with expectations.

National balances shrank 12%, and are now 52% from when the wind-down was announced.

As was the case last quarter, required reserves decreased, down $9 million linked quarter.

Income CRE represents balances of $2 billion, with the majority of the portfolio managed by our regional bank.

Charge-offs were $17 million for the quarter, up as expected from last quarter's $14 million.

We expect the economic environment to remain challenging for this business line.

On slide 11, you will see a view of our C&I portfolio which totaled $7.7 billion at the end of first quarter.

Charge-offs for the quarter were $30 million, down as expected from $41 million in the fourth quarter.

Loss factor updates and grade migration drove a reserve build for the quarter, but we actually experienced less grade migration than in the fourth quarter.

As a reminder, included in our C&I portfolio is our trust preferred loans, and other loans to banks.

In aggregate the bank and insurers and our trust preferred loans are solid.

You can see on the right side of the slide, the capital levels and the number that have received TARP.

We did have two of the 39 issues elect interest deferral in the first quarter.

These loans were evaluated for specific impairment via our FAS 114 process.

The balance of our trust preferred and bank related loans are assessed quarterly to ensure accurate risk rating.

I will finish up on slide 12 with an overview of how we think the remainder of 2009 will play out.

Here we have tried to take the expectations we outlined last quarter, and give you an update of what has changed.

As a general statement, our expectations today remain generally consistent with our prior view.

Throughout the remainder of 2009, our expectations for charge-offs remain as presented last quarter.

Our original expectation that income free losses will decrease from fourth quarter levels in the second half of the year, is most at risk due to market conditions.

Reserves should decrease in OTC and residential CRE portfolios as they wind down.

Consumer portfolios are expected to continue to have incremental builds based on our economic outlook.

Finally, C&I and income CRE reserve expectations have changed for the first half of the year, due to the build we experienced this quarter.

Our expectation is that reserves for these portfolios are likely to be adequate at current levels, based on the recent quarter to quarter decrease in reserve build due to grade migration.

In aggregate, we expect reserves to remain near current levels, before declining in the second half of 2009.

Clearly these expectations will he be influenced by macro economic conditions, as well as our own success in continuing to wind-down the national portfolios.

With that, I will turn the call over to BJ to discuss our financial results.

Great, thanks Greg, and good morning everyone.

Let's start on slide 14 with a look at the consolidated earnings.

As Bryan mentioned, earnings per share were a loss of $0.39, with net loss available to shareholders at a loss of $83 million, including $15 million after-tax impact from CPP dividends, as well as the $92 million pretax impact from the loan loss reserve build.

While the bottom line numbers don't show it well, our businesses performed solidly, generating pretax pre-provision income of $187 million.

Let me touch on some of the key drivers of this strong performance.

First, revenue grew 11% linked quarter, as a slight decline in NII, was more than offset by a 21% linked quarter increase in fees.

This was mainly the result of another record quarter in our capital markets business, as well as continued strong mortgage results.

On the expense side, with the higher revenues in capital markets, naturally expenses grew there as well.

In addition, we experienced higher costs caused by the environment, such as credit related expense, and higher FDIC premiums.

Seasonality expense, such as FICA taxes, and the true-up of a life insurance reserve related to employee benefits.

All of these things masked declines in several other categories including base salaries.

I should note that we did early adopt the new accounting standards on fair value, and the interpretation of impairment recognition, but it had very minimal impact on the valuation of our assets.

To help you understand our core trends a bit better, let's spend a few minutes on the key drivers, starting with the balance sheet on slide 15.

You can see that we continue to reduce our balance sheet risk and remain on track, while there are some unusual optics this quarter that require a bit of explanation.

First, we reduced loans by $700 million in the first quarter, largely due to continued wind-down of our national businesses.

And as Bryan mentioned, we completed a $14 billion sale of mortgage servicing during the first quarter.

However, since the servicing did not transfer until April 1st, roughly $100 million of MSR assets does not come off the balance sheet until the second quarter.

Despite reductions to our loans, total assets rose in the first quarter for two reasons.

First, as a result of our strong liquidity position, we had just under $1 billion of excess balances at the Fed over quarter end, that are classified as interest bearing assets.

Since cash is 0% risk weighted, you will note our RWA was down linked quarter.

Core deposits grew 4% linked quarter, as core customer trends continued to be quite strong in our bank.

And are up $1 billion, or 8% from the third quarter of '08.

We experienced faster growth in both retail and commercial deposits, as we focused on increasing share of wallet with target segments.

We have been particularly focused on retaining roughly $1 billion of promotional money market savings balances, and so far we have been very successful at retaining those core balances and repricing them.

As we anticipated, net interest margin was down seven basis points linked quarter to 2.89%, including a six basis point negative impact from those excess balances at the Fed.

Our bankers did a very nice job managing deposit costs, as those promotional rates from the fall rolled off, and volume increased.

Furthermore, we are appropriately improving spreads, as we originate new deals or renew existing credits.

Combined with the flattening in NPAs and continued national business wind-down, these factors suggest that our margin is near a cyclical low, and is likely to improve as 2009 progresses.

Now let's take a look at fees on slide 16.

Fee income rose 21% linked quarter, driven by our two core businesses, where fees were up 13% in the quarter.

Capital markets in particular continues to perform very well.

Fixed income had another record quarter, leading to a $40 million increase in fees.

The mortgage segment also produced higher fees in first quarter, driven by increased origination activity, and continued strong fees from our wind-down servicing portfolio.

Hedging results of $85 million in the quarter benefited from ongoing carry in our swaps, as well as mortgage market conditions.

As shown by previous quarters hedging performance, we think roughly one-third or so of this quarter's results are sustainable in the current rate environment.

On the banking side, deposit fees and wealth management fees are obviously under pressure from the weakness in the economy, but as we step back from the pluses and minuses in the current environment, we feel good about our fee income businesses.

We believe our core banking businesses, including wealth management and treasury services, combined with the niche capital markets business, that can drive a very healthy mix of fee-based revenues over the long term.

Slide 17 talked a bit about efficiency and productivity.

As we refocus back on our core businesses, we also have a big opportunity to become more efficient and productive.

As I mentioned previously, our expenses did increase linked quarter, although you can see from the chart on the left, that capital markets was a significant component of this growth.

We also had a number of other areas that impacted expenses for the quarter, including environmental costs like foreclosure credit, and FDIC premiums, FICA taxes, the insurance, life insurance adjustment I spoke about, and the contra expense we had last quarter, related to Visa.

As you can see on the chart on the right, headcount was down linked quarter and year-over-year as well.

This is even true if you only look at our core business areas, where we continue to focus on efficiencies.

As a result, base salaries were actually down for the quarter Company-wide.

Having said all of this, we are clearly not satisfied with where we are on expenses.

We are working a comprehensive plan to right-size our costs to fit our newer, smaller, and more productive company.

We have already begun taking actions to lower our long-term efficiency ratio.

We have restructured our consumer lending operations, moved to close unprofitable teller-only branches, and aligned technology services to fit our smaller Company.

We think theres much more we can do without touching good costs, that can drive service and other competitive advantages.

Page 18.

Since I have hit the key trends, I will just spend a few minutes on our core business segments.

In regional banking, core deposits grew linked quarter at a very healthy clip, while loans were down just a bit.

As we experienced the full impact of fourth quarter's Fed rate cuts, our net interest margin in the bank declined 33 basis points to 3.88%, although part of this decline was offset in corporate due to our transfer pricing.

Fee income declined $7 million linked quarter, due to seasonal factors, as well as the impact of weak economic conditions on consumer spending and wealth fees.

Expenses increased $6 million linked quarter, mainly caused by those environmental costs and credit and FDIC premiums, as well as the life insurance adjustment.

Regional banking earnings continued to be adversely impacted during the quarter by elevated provision expense of $89 million, which did decline slightly from the prior quarter.

Our regional banking group certainly has more work to do, but is working on exactly the right things.

Margins, deposits, expenses, and good credit performance, which will pay off for us in the long term.

On slide 19, our capital markets business, again our fixed income record quarter led to increased revenues of $197 million.

Importantly, customer liquidity needs and our distribution network are enabling us to achieve these results without increasing our inventory levels.

In fact, our average trading inventory was $1.1 billion in the first quarter '09, down 43% from a year ago.

Expenses were up $36 million from higher variable compensation, but we are deriving ongoing benefit from last year's efforts to streamline overhead.

Pretax pre-provision income increased $6 million to $88 million, also a record for this business.

We are very proud of our capital markets business model and capabilities.

With a diverse fixed income product offering and a strong distribution platform, doing business with over 6,000 depositories and total return clients, our capital markets business continues to benefit from favorable market conditions, including high volatility and tight liquidity.

And we have been able to selectively expand our sales force by attracting top industry talent, while also continuing to develop younger talent.

Going forward, we expect the fixed income business to remain strong, particularly if economic conditions remain poor and liquidity is tight.

As always, however, the magnitude and duration of continued benefit from unusual market conditions is difficult to predict.

On slide 20, even though our focus is shifting towards long-term earnings drivers and returns, we are making sure our Company remains strong, and is most well-positioned to deal with this environment.

And in this environment, capital and liquidity are the keys.

First, in terms of liquidity, good core customer trends and a seasonal rebound in mortgage escrow balances are driving strong trends on the deposit side, and combined with asset reductions, this deposit growth enabled to us retire another $600 million of maturing debt in the first quarter, while maintaining nearly $1 billion in excess balances at the Fed.

We see more opportunity to build deposits as the year progresses, further reducing our loan to core deposit ratio.

With reliance on less credit-sensitive sources of funding, we continue to maintain excess liquidity of almost $7 billion, a cushion of roughly double the net funding needs of our business.

Turning to capital, our industry leading ratios remain strong with Tier 1 at 15%, our Tangible Common Equity to Tangible Assets at 7.1, and our Tangible Common to risk-weighted assets at 8.6.

Since they count as Tangible Assets, our excess balances at the Fed negatively impacted TCE to TA by 20 basis points.

And if you look at TCE plus reserves as a percentage of risk-weighted assets, which are really the two forms of loan loss taking capital, we have continued to increase over the last year to 12.6%, one of the highest ratios in the industry.

Let me wrap up with a summary on slide 21.

Bottom line, that we feel good about what we have accomplished and where we are heading.

Our core businesses are performing well in a tough environment.

We think our NIM is nearing a cyclical low, and should increase going forward as we improve pricing discipline, and get paid for risk.

Deposit growth in our core bank has been excellent, yet we see potential to expand our share even further.

Capital markets is coming off two record quarters in the fixed income business, and should continue to do well, especially as long as current market conditions persist.

We have opportunities to cut bad costs, while being more productive with good ones.

And our businesses and our management teams are focused on exactly the right things.

We have talked with you at length in the past about our proactive approach to asset quality.

While there is no doubt that the economy will be difficult in '09, we have improved clarity around our loan portfolios with each passing quarter, especially the most problematic wind-down businesses.

Our slowing rate of growth in NPLs and charge-offs bear this out.

Lastly, we are prepared to face whatever the economy throws at us with among the best reserves in capital in the industry, with a liquidity base that is very strong.

We are focused on building a company with an emphasis on delivering solid and sustainable long-term returns and consistent profitability.

As most of you know, I was new to the Company at this time last quarter, and had a lot to learn about both our opportunities and our challenges.

And after rolling up my sleeves, I feel even better about our future than I did just 90 days ago.

We are strong.

We have got good businesses with real competitive advantages, including a deep bench of talented employees.

We expect the environment to be tough but we think we are tougher.

We look forward to showing our investors and our customers what First Horizon can do.

Thanks, and now we will take your questions.

Today's question-and-answer session will be conducted electronically.

(Operator Instructions).

We will pause for a moment to give everyone an opportunity to signal.

And we will take our first question from Steven Alexopoulos with JPMorgan.

Bryan, in your opening comments, you mentioned the stress test.

Are your regulators putting you through the same stress tests that the banks over 100 billion in assets are going through?

No, Steve, I was trying to emphasize that we have done our own set of stress testing.

We have not been involved with our regulators in preparing stress testing.

We have done our own work around, stressing for cumulative losses, and trying to build in economic factors similar to what you see in the stress testing process, but this is an internal process only.

Can you talk about any plans you might have to sell assets to the PPIP fund?

Sure.

We have run the numbers, Steve, and as we look at it, and based on our preliminary evaluation, it looks like the PPIP as it is structured today, is not likely to close the wide bid/ask spread that exists on these assets.

So right now I would say that the likelihood that we participate is somewhat low, but as it evolves, we will learn more about it.

As other people use it, we will see whether it actually closes the gap some, but at least at preliminary analysis, the cost of participation looks higher than we think is appropriate for the assets.

We think we can get a lot more value out of them working it out ourselves.

And just one final one.

With your guidance on the allowance, do we need to see a stabilization in the unemployment rate to see that come down in the second half, or are you just saying that you expect that will you provide it at that point for the bulk of the losses?

This is Greg.

I think as we talked about last quarter, it is really looking at our portfolio and how it is composed in the interplay.

We do expect the economic conditions to deteriorate, and have factored that into expectations around reserve build, particularly on the consumer portfolios.

The reason we feel that we are positioned to release potentially in the second half, is because a lot of reserve has been attracted to those national wind-down portfolios, and they are playing themselves out, and the reserve build has actually been released on OTC the past two quarters, and there has been release on res CRE the last two quarters, and that is expected to continue.

We also think that we have built aggressively on the balance of the commercial portfolios, and we don't expect material build there.

So the interplay of all of that, would lead to us believe that we will have a release in the second half.

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

With your income CRE portfolio, is there any way you could maybe talk about which geographies, which collateral pipes you are most worried about, where we are seeing the most deterioration?

Yes, Ken, looking across the portfolio when we look at the different types, multifamily, office, retail industrial, really there is fairly consistent metrics, in terms of our level of classified assets.

The piece that is sort of the outlier would be the land components, regardless of where it is, and will you recall us talking in fourth quarter about those income CRE losses being primarily driven by land, those happen to be Florida related land credits.

So the stress is fairly equal across property or income CRE types in our portfolio, land being the outlier.

The performance in national is somewhat less, partially because of geographic contributions, but also partially due to the fact that we are winding that business down.

Our flag is down in those markets, so customer behavior becomes a little bit different, and that drives incrementally worse performance in those markets.

Hey, Ken, it is Dave.

I would also note there is a slide, in the Appendix of the slide deck, that has some of the, shows the geographic and the collateral type distributions.

There is also a table on page 30 of the Appendix that would show you where the portfolio is by state, and what the NPL rates are by state, and it very much confirms what Greg is talking about.

So that is some other helpful data points there.

Okay, great.

The other question I have, in terms of the mortgage banking earnings, I think I heard correctly that the sustainable run rate is about a third of the 83 million you had on a pretax income basis for the quarter.

Maybe just talk about, is that something that we should see decline immediately in second quarter, and also how does, I guess the trends play with, what was it, the $14 billion bulk sale you had this quarter?

Well, this is Tommy Adams.

The mortgage earnings, like with other banks that have mortgage servicing portfolios, benefited from a positively slow deal curve, that gave us a lot of positive carry on our hedges.

We expect that to continue.

Also, the asset profile is positive and easier to hedge, so we think these are sustainable for the foreseeable future, along the lines of the guidance we gave at 35 to 40%.

And Ken, just one clarification.

The 85 million was one component of mortgages earnings.

It was the hedge performance.

But you have also got baseline servicing fees, you have got runoff, you have got some expenses, so the actual pretax income of that segment is a little bit less.

But I think the concept you have got right.

We will take our next question from Paul Miller with FBR Capital Markets.

Please go ahead.

Thank you very much.

On slide 11, when you talk about your C&I portfolio which is mostly Tennessee drive, can you talk a little bit about how the Tennessee economy is going?

I think you gave guidance in the next slide that you felt that the C&I portfolio would be relatively flat.

With the unemployment rate surging probably past 8.5% in the next month, can you just add some more color to that?

Sure, Paul, this is Greg.

We have talked about our C&I portfolio a bit.

We have historically had fairly conservative name limits, and so the portfolio is fairly granular, and the Tennessee economy itself is fairly diverse across the state, very different across three sections of the state.

And then from an economic conditions standpoint, I think the national effects certainly are being felt in Tennessee too, probably lagging other parts of the country, but certainly being felt.

So our anticipation is a little bit more of the same, in terms of incremental deterioration in the book, when we think we have worked with customers to understand their condition in anticipation of year-end results and annual statements being issued, so we feel like we have got your portfolio graded and reserved for, based on what we think is going to happen.

We think any further deterioration will be continued incremental deterioration quarter to quarter.

And what is the unemployment rate in Tennessee?

I don't know that number.

As I recall it was a little bit above the national average.

I think it is 50 basis points.

North of 9% in Tennessee today, I think it is about 9.5.

9.5 And then just to follow up on the last question of the mortgage banking earnings, do you feel the sustainable run rate is about 35 to 40% of the current, of what you earned this quarter?

Is that right?

Yes.

I think that is right.

Guys, thank you very much.

Thanks, Paul.

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

Please go ahead.

Good morning, Bryan.

Greg this is really to you, I guess.

You saw a 70 basis point increase in one to four family on NPLs, and a pretty big jump in 30 to 89-day delinquencies last quarter.

Can you talk about what you are seeing there, the impact to modifications of all the banks, or bankruptcies, or just kind of what is happening?

Sure, Tony.

Are you focused on the first mortgage portfolio?

That is right, one to four.

I think what you see there are a couple of things for us.

That portfolio is a mix of several traunches of mortgages, pieces that came out of OTC and perm, the scratch and dent portfolio from the mortgage company, and loans that were in the pipeline to be sold that were brought to the balance sheet.

So you have got a mix of different types of mortgages in there, and they are also fairly young, so they are sort of going through a maturing phase, and there are traunches that are, by their nature, the scratch and dent stuff, don't have a great risk profile, so what we have seen is sort of a life cycle of those assets and the mix of those traunches, driving that increase in delinquency.

Got you.

This is Bryan.

Good morning.

Greg is being a little bit polite.

Some of the loans in this portfolio are residuals that we couldn't sell, that were hung in the warehouse, as Greg said, scratch and dent, and the performance characteristics are not representative of what we would construct in a one to four portfolio over time.

Better said.

One other one.

I recall that in the fourth quarter, I believe, you actually saw, if I remember, some improvement in internal risk classification migrations in the C&I book.

It sounds like this quarter you definitely saw that turnaround go the other way.

Any color, I guess, on subsegments, the pace of deterioration, just kind of what your feelings are here today?

Actually, that deserves some discussion, Tony.

I think when we go back and sort of look at most recent quarters passed, in third quarter when we looked at reserve build due to grade migration in the commercial book it was a little over $60 million, about $63 million of build.

In fourth quarter that dropped to about $30 million in build.

Here in first quarter we had about $34 million in build.

When you get behind that number a bit, in our reserving process, we go through a continual process of updating loss factors, and other components to make sure that our reserve model takes into account the most current information quarter to quarter.

If you neutralize for some of those updates, the reserve build associated with grade migration was about half of what we built in commercial.

So the bottom line there is we saw a halving again of reserve build, due to grade migration in the commercial book, and that is what makes us feel hopeful, that we are nearing the peak of reserve build in commercial.

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

Please go ahead.

Hi, guys, it is actually Joe Stieven.

Hey, Joe.

In the quarter you guys announced that you paid down $600 million of debt.

Could you just tell us, because I didn't see the detail what debts, or tell us what you ended up paying down in the quarter?

Thanks, guys.

This is Tommy Adams again.

We had some bank notes that matured in January, and we paid those off just with the great deposit growth that we had.

So those were scheduled maturities of roughly $800 million in January.

Tommy, this is Bryan.

There were no calls or repurchases either way.

This is just standard maturity of debt.

We had those maturities in January.

We had some maturities in December, and part of the excess reserves at the Fed, that we referred to, are just setting up the balance sheet for some maturities that we we have in May.

Our next question is from Adam Barkstrom with Sterne Agee.

Good morning.

I wanted to see if you could walk back through the TRUPs portfolio, I think you mentioned that two of the banks declared, or decided to defer interest.

Just kind of walk through that commentary again if you wouldn't mind?

Sure, Adam, this is Greg.

As you know, we have those trusts held in holdover form, as a residual from the securitization business and capital markets.

As you also know, take a look at those assets on a quarterly basis to make sure we've got them graded and reserved for correctly.

We did have two elect interest deferral in January, so early in this quarter, and we have gone through and analyzed for specific impairment, consistent with our FAS 114 process, and established reserves appropriately there.

The balance of the portfolio, you see some numbers on the slide in terms of the strength of the underlying assets.

We have given you sort of an average Tier 1 and leverage ratio, and let you know the number that have received TARP, so just to give you a flavor--

Where is that again in the presentation, I am sorry?

That is on slide 11 on the bottom right.

Okay.

Just to give you a bit of a profile of what the underlying loans look like, the quality of the borrower there.

Okay.

So how much was added to the reserves this quarter?

There are two components of that, Adam.

The first would be looking at the valuation we do on a quarterly basis, in terms of their overall grade, so there was an incremental add to the overall trust portfolio, based on the grading profile.

Then for these two specific that were both elected interest deferral, they were both assessed for specific impairment in the 114 process, so out of that grade migration analysis, and to the extent any impairment was identified, we set up a specific reserve for that.

We will take our next question from Kevin Reynolds with Wunderlich Securities, please go ahead.

Good morning gentlemen.

I am going to ask a question and see if you will answer it.

Looking forward, and you may have addressed this in a roundabout way, and I have actually got two questions for you.

First one is, the outlook for provisioning levels, I am on slide 21, where you talk about flattening NPLs, but charge-off growth.

Are we at a point yet, even with a deteriorating economy, where you think that it is provisions cover charge-offs and reserves are strong enough, or do you still need to build the loan loss reserve north of that 4.6 level, because of your expectations with the outlook for the economy?

Good morning Kevin.

I will take that and see if BJ or Bryan have anything to add.

I think as a group we feel like we are getting close.

We are continuing to try to absolutely do the right thing, and not take our eye off the ball, and make sure we continue what we have been doing for the past several quarters, and being very straightforward, in terms of dealing with deterioration and issues in the portfolio, but I think universally amongst the management team, it feels like we are getting very close to that inflection point on reserve build, and we are hopeful that the second half of the year gives us some relief there.

I will let Bryan and BJ add to that.

This is Bryan, Kevin.

I have said before, loan loss reserving over many years has become less of an art, more of a science, and the utility of modeling in this environment becomes less and less.

We have put a lot of work into loan loss reserve modeling, Greg and his team spend a tremendous amount of time on it.

We work to refine our models.

Intuitively, I think we have gotten closer to the point where we have got very strong loan loss reserves that the pro-cyclical nature of loan loss reserving in general is running it's course, and we ought to be much, much closer to the point where we see covering charge-offs being more the norm.

Not that that is the end objective, but that is probably what happens because of the reserve build we have had over the past several quarters.

Okay.

The second question I have is, not specifically related to that, but the competitive dynamics in the core bank.

So inside Tennessee on loans and deposits, not just pricing, but maybe terms what are you seeing maybe by market, if you could?

Are you seeing any differences between say Memphis, Nashville, Knoxville, et cetera?

Yes, we are, Kevin.

This is Bryan again.

We are seeing some regional differences, and it is really driven by various competitors.

What we are seeing is some outliers, in terms of deposit pricing.

Not probably as much as we saw around the end of the year.

It is probably better today in all of the markets, we feel our competitive positioning is very good in all of those markets, as we have pointed out two or three times in the prepared comments.

We felt very good about the customer trends.

We got good deposit growth all across the franchise during the quarter.

We feel good about account openings, and so the market dynamics across the state tend to be influenced by the competitors we face in those markets.

But competitive dynamics have probably improved a little bit over the last 90 days.

We will take our next question from Christopher Marinac with FIG Partners, please go ahead.

Good morning.

Bryan, I was curious on your philosophy at this point about doing FDIC transactions, particularly if you have to assume assets?

Is that something you are willing to do, or is it not the right time?

Chris, thanks for joining us with that question.

I guess my philosophy probably hasn't changed very much.

It is hard to say what FDIC transaction may come up in our marketplace, but our general bias has been we are making a tremendous amount of progress on working through our nonperforming portfolios, we have got a great opportunity in this period to work on our business models, BJ and Greg pointed out, just reworking our consumer lending processes, which we have made great progress on.

So I guess the short way of saying it is our bias is to focus on building our business, growing our customer base, working through problem assets, reducing costs in our organization, and getting positioned right, less on what may come out of an acquisition environment today.

I think there will be plenty of time for that in the future.

Now, I say that with full knowledge, you don't know what is going to happen, and our marketplaces are contiguous in the next several months, but our bias would be to continue working on our business, and working on the initiatives that we have enumerated in this call, and build the business and position it for a much better environment and economy to grow the business over the long term.

Great, that is helpful.

One quick follow-up, separately on deposits.

To what extent does seasonality play a role in some of the DDA success you had this quarter?

You are correct in asking about that seasonality because of the tax dates, but we don't think that seasonality played much, if any, of a part in our solid core deposit growth for the quarter.

What we have seen in April is the IRS build up.

We will take our next question from Gary Tenner with Soleil Securities, please go ahead.

Greg, just a follow-up to your comment, home equity portfolio, where you commented about the peak past dues, and the 24 to 36-month age.

In this environment, with the combination of factors, including unemployment and home prices, how comfortable are you with that assumption, and how much is that factored into your expectations for reserve build in that portfolio?

Hey, Gary.

Good questions.

I guess I would answer it from two different angles.

Our reserve is built based off of what we are seeing sort of in most recent periods of time, with respect to delinquency build and roll rates.

We also come at it from sort of a longer term view and the cum losses, and how those underlying vintages will play out.

So when we think about setting expectations around the portfolio, we take both views in mind.

I think when you look at most recent months, the data the reserve model is built on, there are some fairly significant deterioration in delinquency rates in the second half of the year that the model is taking into account.

So I think a lot of the rate of deterioration that is built in there is pretty significant.

We have had to use overlay management judgment on those near-term trends to set the appropriate reserve level, so that is the near term view, is we think that what we are setting in terms of expectations or reserve build, takes into account a pretty significant rate of deterioration in the economy.

The underlying dynamics I was getting at, is the fact that independent of economic changes, the basic life of a home equity vintage plays out across the years, and you start to see delinquencies emerge after about 18 months, and really have peak in that 24 to 36 months.

So if you look at independent of any economic change, the underlying vintages in the lives and how losses play out, '05 and '06 do peak in '09, and a good part of '07 is incorporated in '09, so we think those underlying dynamics of the vintages help us in the long term, and make really this the peak year.

That was a rambling answer to you, but I am trying to give you a view on how we come to that consensus expectation.

Thanks, that is helpful.

We will take our next question from Jefferson Harralson with KBW, please go ahead.

Thanks, guys.

Like to ask a question on your 90 days past due, and the resolutions that you guys have seen since quarter end.

Do you think those resolutions represent a change in market conditions?

Is it increased liquidity?

The value of the assets?

Ability to sell the note or the loan or turn around the business, or something that has just generally changed, has allowed some of these banks that were seriously past due to come back?

Yes, I think it was a confluence of a number of things.

There were four to six loans that accounted for probably two-thirds of the 90-plus day, and in two situations, there were loans which we participate with the banks, and documentations closed around the 30th of the month, and didn't get processed until into April, and we don't go back and restate delinquency trends, based off of administrative factors like that.

Those transactions actually resolve.

So it was more around the administrative process of doing renewals on a certain number of very large commercial and income property, and some res CRE deals that drove that.

Now if you take all of that out and neutralize the delinquency 30-plus number, you did see an increment absent that administrative, you did see a minor increase in C&I, probably 30 basis points or so.

You did still see an increase in income CRE and res CRE, but the magnitude of that increase is reduced significantly.

We will take our next question from Al Savastano with Fox-Pitt Kelton, please go ahead.

Good morning, how are you?

Good, thanks Al.

Two questions.

I think you probably answered the first one already, but the large increase in the 30 to 89-day delinquency trends, that was due partially to the 90 days past due, or are those two separate numbers?

The 30-plus influenced by the same dynamics as the 90-plus issue.

I think the 30 to 89 increase would be more a factor of the increase in delinquency we saw in the home equity portfolio in January, would probably be the major driver of that.

Okay.

So can you reconcile that then, with the relatively flat NPLs?

With your projection going forward?

Yes, I would do it this way, Al.

The NPLs, as we pointed out, the majority of those NPLs are associated with the commercial portfolios, and the majority of those NPLs are associated with the national wind-down.

With the driver that in increase in 90-plus was in commercial, and it was specific to those accounts I talked about being more administrative issues.

So I think the 90-plus day trend, if it weren't for those administrative issues, would signal that NPLs would likely increase, but we got behind those numbers, and have the detail on every one of those accounts.

I approved every one of those to go over 90 personally, and we have got two-thirds of those resolved currently.

So I don't think that trend would lead to increased NPLs, as we know what is behind it.

And I would just add, on the home equity portfolio, Al, you would see that we have almost no NPLs, because our charge-off practices are such that once you get to 90 days, they are pretty much charged down or charged off, so you really wouldn't have any NPLs generated by that portfolio.

I think we have a total of $5 million in nonperforming loans associated with the 7.6 billion equity book.

Good, thanks.

And then in terms of my second question, if I remember right last quarter, the overall tone was expecting to be profitable in the first quarter 2010.

Given the actions that you guys have taken so far, is there any chance that that potentially could be moved up?

Al, this is Bryan.

I am smiling, because I am not sure we said that.

(laughter).

But I think your tone is right.

In a general sense, the key to driving profitability for us is credit, and getting the wind-down of some of these national portfolios worked through.

We are very encouraged by the underlying trends in our businesses.

We think there are great opportunities to enhance those businesses, with our efforts around cost reduction and process improvement, as BJ described it, taking out bad costs and making ourselves more productive with good costs.

So the key to that turn in profitability is not an issue with the underlying businesses.

They are doing exactly what they need to do, and we are on the right path there.

And we are making good progress and working through these portfolios.

So whether it is late 2009 or early 2010, I am not sure we can pin the tail on that precisely, but we feel very good about making that turn over the next several quarters.

And this will conclude today's question-and-answer session.

Mr.

Jordan, I will turn the conference back over to you for closing comments.

Thank you, Operator.

Thank you all for joining us this morning.

We are pleased with the progress that we are making, and we are pleased with the path that we are on.

We think we are making very good progress.

If you have further questions, please don't hesitate to contact Dave, or any of us, we would be happy to give you additional information.

So thank you all.

Hope you all have a great weekend.

Bye-bye.

Ladies and gentlemen, this will conclude the First Horizon National Corporation first quarter earnings conference call.

We thank you for your participation, and you may disconnect at this time.