First Horizon Corp (FHN) 2009 Q3 法說會逐字稿

Good day, everyone and welcome to today's First Horizon National Corp.

third quarter 2009 earnings conference call.

Just a reminder that today's call is being recorded, at this time it is my pleasure to turn the conference over to Aarti Bowman.

Please go ahead.

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 would need to inform you that this conference call includes 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 the forward-looking information.

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

First Horizon National Corp.

disclaims any obligation to update any forward-looking statements that are made from time to time to reflect future events or development.

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 footnote of the slide and/or the appendix of the presentation available in the Investor Relations of our Web site.

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

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

This morning speakers include our CEO, Bryan Jordan, our CFO, BJ Losch, and our Chief Credit Officers, Greg Olivier, and Dave Miller.

With that I will turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone.

And thanks for joining our call.

Let's begin on slide three.

During the third quarter, we continued to successfully execute our strategy to de-risk our balance sheet and restore First Horizon to consistent profitability.

We reported a third quarter loss of $0.24 per share.

This quarter's loss was significantly lower than first and second quarter losses and in line with our expectations.

Although they are accomplishing, environmental costs environmental costs, mostly credit related, and a challenging economy are still taking a toll and impacting reported numbers.

Consolidated third quarter pre-tax, preprovision income rose to $145 million, up $64 million, linked quarter, as our core businesses showed continued solid performance while there was lesser drag from costs associated with our wind-down businesses.

Looking beyond the bottom line, we're making good progress in repositioning First Horizon and delivering on strategic commitments, as you will note on slide four.

On asset quality, our proactive efforts are paying off as third quarter credit quality trends were generally in line with expectations, as a release in our national construction portfolio reserves more than offset an increase in C&I and income CRE reserves.

This enabled a drop in third quarter's provision while leaving our allowance for credit losses at a strong 5.1% of loans.

We also saw a drop in overall net loan charge-offs in the third quarter.

And nonperforming assets edged down for the second quarter in a row.

Given ongoing uncertainty about the economy, we're not ready to declare victory yet, but we definitely believe we're making progress.

During the quarter, our capital ratios also improved.

Quarter end, First Horizon's tangible common equity to tangible asset ratio was a strong 7.9%, up 60 basis points linked quarter.

We're taking aggressive actions to further de-risk our balance sheet.

We reduced total assets over $2 billion in the third quarter.

This included another $500 million reduction in the size of our wind-down national specialty lending portfolio as well as reductions in trading securities and excess Fed balances.

New loan bookings aren't keeping pace with the loan paydowns and payoffs, which explain the remainder of third quarter's balance sheet shrinkage.

Looking ahead, we expect another $400 million runoff in the national specialty lending portfolio by year-end.

Finally, yet perhaps most importantly, refocusing on our core regional banking and capital markets businesses is paying off.

We're particularly pleased with the continued growth in our customer deposit base, with core deposits up 3% second to third quarter, and as anticipated, our net interest margin increased another 9 basis points, reflecting an improved funding mix and greater pricing discipline.

As I mentioned earlier, loans were down in the third quarter despite originating almost $400 million in new and renewed loans.

We're proactive in the marketplace, lending to individuals and businesses, but paydowns and runoff are outstripping loan demand in this uncertain economy.

In capital markets, fixed income revenues were again very good this quarter, well above normalized levels, though not as strong as the past two quarters when we experienced unusually favorable conditions.

While our core business's third quarter performance was in line with expectations, there is still considerable work to do to reach our long-term objectives.

I will be back in a couple of minutes with some final comments, and now, BJ will take you through the third quarter's financial results.

Great, thanks, Bryan.

And let me start on slide six, and go over the third quarter's consolidated financial results.

On a per share basis, as Bryan mentioned, we lost $0.24 after discontinued operations, the sale of our capital markets equity research business, which was an improvement from last quarter's loss of $0.57 a share.

We had a net loss of $53 million, compared to second quarter's $123 million loss, $75 million provision drop, along with lower environmental costs drove the linked quarter bottom line improvement.

As Bryan mentioned, total pre-tax pre-provision income increased to $145 million, benefiting from an overall 2% rise in revenue, coupled with a 13% drop in expense, both of which I will discuss in a little bit more detail in a few minutes.

If you look on slide seven, and look at pre-tax pre-provision contribution, by each of our business segments, you can see that our core businesses, regional banking, capital markets, and our corporate segment, booked pre-tax, pre-provision earnings of $118 million, a solid showing, but about $13 million below second quarter's levels.

Regional banking's pre-tax, pre-provision earnings declined slightly link quarter, to $36 million, due to slightly higher foreclosure expense and modestly lower NII, even as an 8 basis points improvement in the regional banks net interest margin occurred.

That was offset by the decline in the average earning assets that we had in the regional bank.

In the capital markets side, our pre-tax pre-provision remains very strong at $65 million, although down from the record 2Q '09 levels.

Corporate pre-tax pre-provision earnings benefited really from two major occurrences.

One was a $7 million reserve reduction, which shows up in expense, related to Visa's escrow funding, and a $13 million debt repurchase gain, which shows up in revenue.

As a side note, the agreement to sell our equity research business resulted in a pre-tax goodwill impairment charge of $14 million, which is in the corporate segment under discontinued operations.

So as you can see, our wind-down businesses posted considerably better pre-tax pre-provision profits in the third quarter as mortgage banking was up $20 million, versus a loss of $33 million, last quarter.

And national specialty increased to $8 million linked quarter.

The mortgage results were helped by a $31 million net hedging gain, and a positive $5 million valuation adjustment in our mortgage warehouse, as well as lower repurchase expenses.

In National Specialty, our foreclosure expense remained elevated at $22 million, as we continued to move ORE off our balance sheet, and that stayed relatively flat versus last quarter.

And importantly, as another step in reducing our risk, we reached a settlement agreement on our consumer repurchase reserve which lowered that fairly substantially this quarter.

Turn to slide eight, since both net interest margin and balance sheet dynamics are among the keys to returning to sustained profitability for us, let's take a look at some of the third quarter balance sheet trends.

We're continuing to aggressively derisk and shrink the balance sheet as we wind down the national businesses.

And we're making really good headway in improving our funding mix, and it shows in our solid NIM expansion.

Our consolidated average core deposits increased as our bankers focused on growing customers and deposits in our core markets, and that is paying off in higher levels of commercial and consumer accounts.

Year to date, through September 30, commercial and consumer checking accounts grew a net 2%, and 3% respectively.

Our balance sheet shrinkage and core deposit growth enabled us to decrease funding costs, helping to drive the consolidated margin up 9 basis points linked quarter.

You will note in the lower left of the slide, on slide eight, that the core franchise net interest margin improved to 3.66%, this quarter, as the regional banks saw wider spreads from improved deposit rates, as well as better pricing on new loans.

Turning to slide nine, I will highlight a few third quarter fee and expense trends, which are obviously also critical elements of our profit improvement strategy.

Fee income was relatively stable at 61% of total revenue, with an expected decline of fixed income revenue, largely offset by stronger net hedging results and mortgage warehouse gains.

Regional banking fees were flat from second quarter of '09.

And as a note, we are obviously studying the potential legislative impact of NSF-OD's and we're exploring a variety of new overdraft protection products, product enhancement, and process changes, designed to provide customers effective tools to manage their deposit accounts.

Nevertheless, NSF-OD fees for us are less than -- or around 5% of our total revenue, and should not significantly impact our profitability.

On the expense side, total expenses declined $53 million, or 13%, and the reduction in our core business expenses accounted for $19 million of the decline, reflecting successes in driving down fixed costs and improving productivity, as well as lower variable comp tied to the drop in capital markets fee income.

Additionally, we calculate that environmental costs declined to approximately $45 million in the third quarter, from second quarter's roughly $70 million.

One driver was the FDIC deposit premium costs, which were down $13 million due to the absence of second quarter special assessment, and the rest was largely made up from lower repurchase reserves and expenses.

Turning to slide 10, to give you a little bit of idea of returning to sustained profitability and what that means for us, we believe we're on track to return our Company to long-term sustained profitability and growth.

We've talked about the key drivers of getting there and these largely played out in the third quarter.

First, our net interest margin rose for the second consecutive quarter.

Second, our environmental costs started to abate as those repurchase expenses declined and foreclosure expense flattened.

Third, the provision dropped by $75 million.

Fourth, total expenses declined by approximately $50 million.

As this reflected not only improvement in those environmental costs, but the fact that we're realizing benefits from our productivity and efficiency efforts.

And lastly, as we expected, our capital markets fixed income sales remained solid, although revenues began to normalize following recent record quarters.

To wrap up, although we continue to have elevated expenses from credit and environmental factors, third quarter showed positive trends with solid pre-tax pre-provision earnings from margin expansion and healthy fee income, coupled with lower provision expense.

And with that, I will turn it over to Greg, who will now discuss some encouraging credit trends.

Thanks, BJ.

I will start on slide 12.

As a general statement, asset quality was largely in line with our expectations.

Charge-offs totaled $202 million, down $37 million from last quarter.

The decrease was primarily attributable to lower losses in our one-time close and residential CRE-portfolios, which offset increases in C&I losses driven by trust preferred loans and bank holding company loans.

Our reserve level was down $17 million from last quarter.

As expected, a decrease in reserves associated with the national construction portfolios more than offset an increase in reserves for the income CRE portfolio.

As a result of lower charge-offs and lower applied reserves, total provision expense decreased $75 million for the quarter.

Moving on to slide 13, nonperforming assets declined 1% for the quarter, continuing last quarter's marginal improvement in this measure.

Nonperforming loan levels decreased, primarily a result of winding down the national real estate portfolios.

As anticipated, we did see higher problem loan inflow from C&I, particularly in bank-related exposures, and in the income CRE portfolio.

ORE levels also decreased for the quarter.

The increased inflow into ORE, a result of working through our problem real estate loans, was more than offset by disposition activity.

Disposition activity primarily took the form of single asset dispositions, although bulk sales and auctions were used selectively.

Note the valuation adjustments, the expense we incur as a result of continually adjusting the carrying value of ORE to ensure it is valued realistically, remains significant, totaling $10 million for the quarter.

Now, let's spend a few minutes on the key portfolio trends.

As you can see on slide 14, the C&I book had balances of $6.9 billion, at quarter end.

Overall portfolio metrics deteriorated; however, much of the deterioration was associated with trust preferred and other bank-related loans.

Excepting these loans, performance was more stable, and required reserves would have decreased somewhat.

C&I charge-offs totaled $44 million for the quarter.

$25 million of this amount was associated with trust preferred and other bank related loans while $17 million was associated with all other C&I exposures.

Slide 15 gives you a little more insight into the trust preferred and bank-related loans held by First Horizon.

In total we have $710 million in these categories.

While this entire portfolio receives elevated oversight, certain portions are viewed as potentially more problematic than others, and are managed accordingly.

In order of concern, the $301 million of trust preferred loans extended to banks is the area of greatest stress.

Over one-third of this portfolio is classified and highly reserved for, while the balance has a less concerning profile.

Loans to bank holding companies are also of elevated risk with 37% classified and well reserved for at quarter end.

The balance of this portfolio is of less concern.

Most are long-term customers well known to First Horizon.

Many are in low risk markets and their ratios are generally in acceptable shape.

$164 million of this exposure is trust preferred loans to insurance companies.

The majority of the insurance company exposure is graded pass and is viewed as lower risk.

19% is graded classified and is reserved for accordingly.

The $105 million in loans extended generally to individuals secured by bank stock often have a primary source of repayment that is not linked to the bank itself.

Like the bank holding company loans, these are generally relationship loans to individuals well known to First Horizon.

On slide 16, our income CRE balances were $1.8 billion at the end of the third quarter.

The $15 million decline in charge-offs from second quarter was anticipated but should not be read as an improving trend in this portfolio.

Market conditions will be adverse for income CRE portfolios at regional banks for the next couple of years.

Economic conditions will continue to stress cash flows but, more significantly, renewal events will force right-sizing of loan amounts, as property values have declined meaningfully.

Our focus is on working through this period in a manner that is sensitive to both regulatory guidance and customer relationship impacts.

Expect elevated reserve levels and charge-offs throughout this period as remediation strategies are executed.

However, the profile of both is expected to be less severe than residential CRE, due to the income producing nature of most of the collateral.

We increased reserves related to income CRE meaningfully during the quarter and they now stand at 8.3% of loans.

On slide 17, you can see that the national wind-down portfolios remain on track, as balances declined by almost $500 million, and we were able to reduce reserve held for these portfolios.

OTC balances were down $196 million from last quarter.

And we have now reduced commitments and balances well over 80% from January 2008.

OTC charge-offs were down $17 million and required reserves decreased $55 million, but held at 30% of loans.

National residential CRE balances were down $102 million from last quarter and reserves held flat at 9% of loans.

Charge-offs were down $13 million from second quarter, as this portfolio continues to show signs that its issues have peaked.

Permanent mortgage had balances of $1.1 billion at quarter end and charge-offs were $17 million, down slightly from last quarter, as this portfolio shows signs of stabilization.

Moving on to slide 18, home equity balances were $7.2 billion at quarter end.

Our national portfolio decreased by $186 million, to $4.5 billion, while the core portfolio remained relatively flat at $2.6 million.

Portfolio performance was as expected.

Delinquency trends were up slightly, due to continued economic issues, as well as some seasonality impacts.

Charge-offs were flat, and actually down slightly, compared to second quarter, as the underlying vintage characteristics of this portfolio begin to benefit us marginally.

Our expectation is that this portfolio will continue to generate losses at a level similar to the last two quarters over the next several quarters.

This expectation assumes continued stressed economic environment, however assumes no future severe downward trends from current situations.

On slide 18, we have detailed our credit expectations.

Third quarter played out largely as anticipated.

Decreased charge-offs in the national construction portfolios offset increase C&I losses, and decreased reserves in the national construction books offset reserve builds in income CRE and C&I.

We have again updated our directional trend arrows to show fourth quarter expectations compared to third quarter.

As you can see, we expect similar charge-off levels to this quarter and somewhat lower required reserves.

As we look to 2010, we expect that the national construction portfolio should largely be resolved during the year, and the home equity portfolio is expected to generate losses and require reserves similar to or somewhat less than recent experience.

Income CRE and bank exposures are expected to continue to be stressed, with core C&I expected to fare better.

Thanks.

And I will turn it back to Bryan to conclude the call.

Thanks, Greg.

In summary, due to the hard work of our employees, third quarter demonstrated real progress from our strategic actions, as we take steps toward returning First Horizon to sustained profitability.

Our core businesses performed well.

Credit played out as anticipated.

Our balance sheet de-risking remained on pace, contributing to improved liquidity, and our capital ratios improved, giving us both strength for the near term and flexibility down the road.

Long-term, our goal remains to drive strong returns on common equity by smartly deploying capital.

Even in an economy that is likely to grow more slowly, and in an environment where both we and the industry will likely maintain higher capital levels than in the past we believe that we have the core businesses capable of delivering on that goal.

Thanks, and now, we'll take your questions.

Operator.

Thank you, sir.

(Operator Instructions) We will go first to Steven Alexopoulos with JPMorgan.

Good morning, everyone.

Good morning, Steve.

Greg, looking at slide 13, which shows the reconciliation of the nonperformers, when you look at the pipeline of delinquent loans, what is your best guess where than $250 million of new inflows goes over the next couple of quarters?

Hi, Steve.

I think our best guess is flat to incremental improvement.

We feel, and we've felt for a couple of quarters that we're getting close to peaking on nonperforming levels and an expectation of a decline in inflows would be consistent with that.

So you don't expect that level to drop off materially from here, near-term?

I expect the level to decrease, not ready to say it will be a dramatic decrease at this point.

We still have some nonperforming formation in the income CRE portfolio, obviously, and will for some time.

I want to talk for a second on the NIM, which obviously benefited from a pretty sharp production in deposit costs, particularly CD's.

Just wondering how much room do you think you have to further reduce deposit costs from where we are today?

Hey, Steve.

It is BJ.

I think we have some modest room on the CD book, as we're seeing maturities come through, and then rebooking at the lower levels.

And obviously, that benefited us this quarter.

So there is some modest improvement there.

We also saw continued improvement this quarter, continuing on last quarter's, on the average rate paid on our savings account, as we brought in balances last fall, and we have repriced those downward and retained those.

In addition to the checking account growth, which is obviously very low cost core.

So, we're really focused on the lower end and managing our deposit rate pay that way.

So we will continue to probably see a little bit of modest improvement there, and we will continue to work on it.

BJ, you wouldn't expect another 50 basis points reduction in the time deposit cost near term?

I think that was pretty -- that was a pretty substantial reduction, and I don't think, looking at our maturity schedules, you would see quite that level of improvement.

Perfect.

Thanks, guys.

Sure.

Thanks, Steve.

Our next question is from Matthew O'Connor with Deutsche Bank.

Good morning.

Good morning, Matt.

You had more dispositions of OREO this quarter in aggregate than you've had the last few quarters, and I'm just wondering how much of that is you being more aggressive and how much of it is buyers being more aggressive or a combination of the both?

Hey, Matt, this is Greg.

I think it is a combination of both.

As we've talked in the past, there is a pretty firm market for asset disposition at a price.

So there are buyers that are active out there.

We've also put an emphasis on managing our ORE, consolidated that within the Company, in first quarter, and I think are beginning to see some benefits of a very professional staff working down that portfolio, taking advantages of multiple disposition methods.

But still very successful on the single asset dispositions, which dominated our activity in third quarter.

Any thoughts on what 4Q sales might look like if current conditions hold?

Matt, I'm hopeful of continued momentum there.

I think we're strategically trying to get as much of this behind us as we can.

But keep in mind getting the best value for shareholders.

Matt, this is Bryan.

I will reemphasize Greg's point.

We're being very opportunistic.

When we have opportunities to reduce these nonperforming, particularly in these national portfolios, we're taking advantage of those opportunities, we're trying to balance our desire to reduce them with making sure that we get reasonable values for them.

And so we will continue to be opportunistic, and if we have the opportunity, we will take advantage of it, over the next several quarters.

Moving on, we will go next to Ken Zerbe with Morgan Stanley.

Thanks, good morning.

Good morning, Ken.

Two slides I have questions on.

First one, on slide 15, when you talk about the bank trusts, obviously an area of concern.

In the table you have on there, you actually highlight the percentage of banks that have received TARP funding.

Why exactly are we highlighting that?

I mean do you believe that those banks are higher quality than the other ones, or do you believe you will get better recovery if and when they default?

Just trying to understand the importance of that.

Ken, I will take a stab at that.

We get a lot of questions around the trusts and bank holding portfolio and regarding the TARP participation of those banks so we thought we would go ahead and disclose it to folks.

I think what you see there is that a lot of the very high quality banks may have passed on taking TARP, and when you look at the weaker the percentages goes down, so the government exercised some discretion about who they granted TARP to.

So I don't think there are any surprises in the disposition there.

But short answer is we've gotten a lot of questions on that, so we thought we would provide that information.

And if those banks that did receive TARP were to fail, would you expect to have pretty much 100% severity on this?

Yes.

Okay.

I don't think it impacts the loss, given default on the loans.

Understood.

This is purely just informational with respect to a binary outcome.

Either they took TARP or they didn't.

No, understood.

I just wanted to make sure I understood that.

And the second question is just on page 19, the arrows -- and I love this chart by the way, it is very, very helpful.

But when you look at the allowance, or the reserve ratio overall, you're at 945 now.

Do you expect resi, CRE and one-time close to come down, which actually are smaller balances, well, smaller balance loans and smaller reserves but then offset by increases in commercial and income CRE which are both higher balances and higher reserves, mathematically, I guess, I just want to make sure I'm thinking about this right or that you're thinking about this right, to have the overall reserve come down from 945 would mean very small increases in commercial and income CRE and very big increases in those smaller balance resi and OTC.

Is that the right way to think about this?

Because numerically I would just imagine that the increases in the commercial might be a little bit larger than the decreases.

Ken, I think that's the right way to think about it.

If you remember on one-time close, we established a reserve for what we viewed was the remaining inherent loss content in that wind down portfolio.

So it essentially gets reduced dollar for dollar for charge-offs, if our estimate of remaining losses at the end of next quarter remains consistent with this quarter.

That provides meaningful relief that -- to this point, and did in this quarter offset gains on those larger books.

The next question today is from Brian Foran with Goldman Sachs.

Good morning, guys.

Good morning, Brian.

As we watch capital ratios build, can you just remind us, where you feel like long-term, you would like to migrate toward, and what you need to see to feel like you have excess capital that can be deployed, and then as you walk down that food chain, how you're thinking about deploying capital over time?

Hey, Brian.

It is BJ.

I think you see by our capital ratios, that through our deleveraging and smaller loss, they jumped fairly substantially, I would say, on TCE, and tier ones now, over 16%.

So I think we feel very comfortable, based on what we see with the credit expectations that we have, that our capital is very strong in today's stressed environment, and even if it got incrementally worse.

And that's what we have prepared for and planned for.

So as we continue to think that we're at or near the peak of our credit issues, we are looking to be a little bit more on our front foot, versus our back foot, and that is looking at things like where internally, where can we look for risk-appropriate loan growth and try to get back in the market, as much as we can, even with the muted demand that we've got.

So looking for select opportunities to pick up business, making sure that the foundation of our Company is ready for anticipated growth over the next couple of years, if that includes things like FDIC assisted transactions.

Over time, getting back to paying dividends, and those types of things, so we're actively looking at what the appropriate time is to put that money to work, and we're thinking about it.

In terms of long-term goals, for where we would like to see capital post the credit cycle is TCE to TA ratios somewhere in the 6 to 7% range, and today, it is at 7.9.

And a tier one, probably 9 to 11% range, is kind of what we're estimating.

So we will look for big opportunities to put it back to work.

Brian, this is Bryan Jordan.

I will add to BJ's comment, or underscore it, we're not uncomfortable letting capital build till this economy stabilizes.

We feel like we have very strong opportunities to put the capital to work, over the next several years, and we see that in customer business, we see that in opportunities with, as BJ said, FDIC assisted transaction and we're not uncomfortable where it is today, and we feel like we have the ability to invest in the business, and bring it down over time, to, as BJ said, in the high 6 to 7% range as the regulatory guidance unfolds.

Thank you.

Thank you.

We will hear next from Tony Davis with Stifel Nicolaus.

Good morning all of you.

I guess to BJ, can you bring us up to speed on where you stand in your revisions to the incentive plan, the internal reporting enhancements I know you're working on?

And I guess further there, the right-sizing of HR and finance and marketing, all those efforts are underway, and kind of maybe the completion date that might be reasonable to expect?

Here is where we are.

We've, as you know, kind of rolled out our high level bonefish, so to speak, and we're in the process of aligning all of our performance reporting from executive reports and dashboards to score cards more down through the field organization as well as the incentive plans, and we are largely on track to have much of that done by the end of this year.

And that's what we've been focused on doing, so that going into next year, we are as aligned with where we need to go long-term, as we can.

So like I said, we're on track there.

As it relates to the efficiency initiatives, over and above lower environmental costs, we are on track.

I would say that we're probably -- we've identified over 75 to 80% of the expense that we need to have come out of the organization, over the next probably 12 to 15 months.

And what we're driving for is having all of those expense efficiencies identified and executed so that our 2010, I'm sorry, 2011 run rate is at the appropriate level.

So we saw incremental improvement again, this quarter, from things like contract renegotiations, from reductions in contract labor, from continued FTE declines, both in our national specialty businesses as well as our regional banking business that we expected based on our action plan.

So I'm pleased with our progress.

On our cost reduction efforts, Tony, as BJ said, we've made a lot of progress there.

We've had a strong focus on differentiating, as we refer to it, good costs and bad costs.

We're trying to make sure that we reduce costs that don't have an adverse impact on our customer service levels.

And we're trying to make some investments in what we would consider good costs, technology and infrastructure, where we need to improve our processes and our system, to do two things.

One, position us for the long term.

And two, produce additional efficiencies down the road.

So we're seeing and very comfortable with what we're seeing in terms of cost reductions flow through the income statement today.

We will put a little bit of that back into investments in 2010.

But overall, I'm very comfortable with the progress we've made in addressing our infrastructure costs.

Bryan, as a follow-up, I guess maybe to tie down the FDIC assisted issue, I mean as you look at the Company today, do you feel like that you're sufficiently along the credit recovery and performance enhancement paths to pursue something there now?

Well, I think that the short answer is yes, the longer answer would include -- I think that is right, but having another three to six months to continue working down these national portfolios, and continue to make progress on the management reporting things, the cost reduction, the focus on improving our operating models is not a bad thing.

But I think we're far enough along, but on the other hand, we're not uncomfortable if that is sometime next year, either.

Our next question today is from Kevin Reynolds with Wunderlich.

Good morning, everyone.

Good morning, Kevin.

I've got a quick question and maybe this is just sort of not really a big picture in the scheme of things in today's report, but when we look at the trend in fixed income, in fixed income business, while it is still elevated it is coming down off the more favorable environment.

Is that all related to environment or, given the nature of your -- sort of your financial institution customer base, is there anything you can read inside that with respect to either liquidity, or -- liquidity going away, for some of these banks, or maybe some sign of life where loan paydowns and all are starting to slow a little bit?

Hey, Kevin, it is BJ, what I would say overall is that what we're seeing is lower volumes because we have very few clients, whether total return or depositories, deleveraging nearly as much as they were.

So if were you an optimist, you would say that that is more a sign that the credit markets and liquidity is improving across the various sectors.

So that's probably a good thing.

So a little bit lower volume and then obviously, as we expected, bid/asked spreads are starting to come in as well.

So it is not unexpected what we saw coming off a record quarter of average daily revenues of 2.7 to 1.9, is again not totally unexpected by us.

And it is still probably 80 to 100% higher than what our overall long-term would be over time.

So we're still very pleased with what we're seeing out there.

It is just starting to slow as expected.

In terms of the mix of the business, over the last several quarters, it has been more heavily tilted toward the total return customer, away from the financial institution customer, so there is not a big shift in what we're seeing in financial institution activity right now.

And I guess one other question and again, I apologize with everything that is going on this morning, if you've already addressed this.

But your balance sheet is down from the mid-30s to I guess $26.5 billion in total assets at quarter end, and I think I heard you talk, Bryan, in the past about kind of feeling like $25 billion was the number where it kind of stabilizes, if I'm not mistaken.

I mean is that still a good number to think about going forward?

Or are you sitting here right now -- I know you said $400 million of national runoff in the next quarter ballpark.

Do you think you will run it down even more?

Is there more to de-risk, as it were?

Or is 25 still the base going forward?

Well, yes, you're accurate in what we've said in the past.

We've -- and I think that is still a good number, plus or minus $25 billion.

We saw a little more runoff in our core banking lending portfolio, principally due to paydowns and lack of utilization.

We had a -- a lot of it was in our C&I portfolios.

So I think the answer to your question lies in two factors.

One, how rapidly we continue to wind down these national businesses.

We do expect another $400 million in pay down over the remainder of this year, offset by what our customer base and our core franchise does in terms of net borrowings over the next several quarters.

But I think, you know, we're very comfortable in that $25 billion range over the long term.

Moving on, we will hear next from Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Good morning, Kevin.

Bryan, you can just remind us again what markets are most attractive for you?

I know you talked in the past about deepening the penetration in Nashville as a priority.

And just kind of what kind of markets within Tennessee, maybe on the outskirts would be of interest to you?

And then on a related note, it seems everyone is talking about the FDIC assisted deals but the pace is going very slow, and the quality of franchise that is being offered always isn't the best, so is it a matter of just waiting, or do you start to think about getting more constructive in talking with live banks, or is it way too early to think about that?

Thanks.

Kevin, in terms of the markets that are attractive to us in Tennessee, clearly, opportunities to build out end markets like Nashville, as you mentioned, as well as any opportunities in and around our existing markets, whether it is southeast Tennessee, the Chattanooga area, East Tennessee, around Knoxville, or Johnson City, Tri Cities area, we would be opportunistic in any of those markets.

Longer term, the markets that we are particularly attracted to are markets that would look and feel like our existing core Tennessee franchise, where we have the ability to build 15, 25, 30 branches, build a top 15, or excuse me, a top one, two or three share in those market, the ability to see at or slightly above national average growth.

And so we've got a sort of a long-term plan, if anything, to continue to build out in a way that allows us to deploy capital in markets like Tennessee, and to take our time doing it, and build that density, and market share.

With respect to FDIC-assisted transactions, to my earlier point, a little more time is not a bad thing, in a couple of ways.

It allows us to do the things I said which is to get positioned better for long term and continue to wind down our national portfolios.

The pace of transactions in and around Tennessee has been particularly slow.

A lot of what you've seen have been in bigger market, places that wouldn't fit our model.

So we're willing to be patient on that.

And the key being an opportunity to get a toe-hold or a foot-hold in a market that allows us to build a tremendous amount of density.

On the regular way transactions, I think it is probably still a little bit early in the cycle for that.

I'm not sure I could pin the tail on exactly when but as I sit here, today, I think that is probably a second, third or fourth quarter of next year, before that market really starts to get active.

I think the key there is, is credit cycle turns, the ability to get your hands around what a credit portfolio looks like.

So all in all, you net all that out and I think you sort of walk away with we're going to be patient, and make sure that we can do the right thing in the right way.

Our next question today is from Adam Barkstrom with Sterne Agee.

Hey, everybody.

Good morning.

Good morning, Adam.

Let's see.

Quick question on page 15, if we can go back to that, the TruPS whole loan portfolio -- you mentioned that one-third of that was classified.

You also did $140 million bank holding Company.

How much -- you did say and I missed it, how much of that is classified?

Adam, it is on the bottom, the loans to bank holding companies there at the bottom, we show the classified, it is that $52 million of the $140 million, or about 37%.

I got you.

I got you.

Great.

Sorry about that.

And then you mentioned on the TruPS and banks, a high percentage reserve.

Can you give us some sense of how much you're holding reserves against that?

Sure, at the bottom of the same page, we've given you the coverage there by risk.

Sorry.

Okay.

I got that.

By risk category.

I got it.

No problem.

Just went through that a little fast.

And then Bryan, I guess historically, you've got a fairly significant deleverage of the balance sheet, you've got a lot of moving parts there, and margin continues to improve.

And the number that I guess that we had thrown around from a core normalized EPS number, if you will, as I recall, seemed to be around the 125 level.

Has there been any change in that number or do you have any color on what, from a core franchise perspective, you think you can earn?

Yes.

As I recall, the way we talked about it was in a core pre-tax pre-provision number, and I think we talked about something in that $125 million range.

There is nothing that has changed in our short or long-term expectations about that, and clearly environmental costs impact it today, the mix of it changes, as banking starts to improve, capital markets continues to normalize.

But there is nothing any different in our thinking about the core earnings power of the franchise.

Clearly, the size of the balance sheet impacts that, where, as I said, in the earlier response to Kevin Reynolds, our balance sheet came down a little bit more, based on customer activity, than we might have hoped.

But as BJ said earlier as well, we're trying to be very much on our front foot, winning customer business, and being very proactive in trying to grow our share, and to grow our banking business.

Our next question today is from Jefferson Harralson with KBW.

Thanks.

Hello, guys.

Hi, Jefferson.

I wanted to ask you about troubled debt restructurings.

Can you talk about the changes in troubled debt restructurings from quarter to quarter?

How much of your troubled debt restructurings are in the performing portfolio versus the nonperforming portfolio?

And just generally what your strategy is with regard to doing that sort of thing.

Sure.

Jefferson, I don't have exact numbers to quote you, but the number of loans with which troubled debt restructure is employed as a strategy is increasing.

It is certainly a focus of the accountants and the regulators and there has been a lot of additional guidance given on that recently.

The majority of that at this stage in the cycle is going to be in the nonperforming category as it needs to season before moving to performing status.

And do you think that -- can you just talk about your strategy on the -- maybe start with the commercial side, and just talk about your restructuring plans?

Are you restructuring a lot that aren't going into TDR's?

And just what your general restructuring strategy is?

Yes, our--.

Along those lines.

Yes, the portfolio where that strategy is most often an option these days is the income CRE portfolio with the issues of property value decreases and having to face that situation at renewal.

Our strategy overall continues to be a, number one, we're a relationship oriented bank, and we have a customer focus that we're trying to maintain long-term relationships through a very difficult point in the cycle.

That's followed very closely a desire to maintain compliance with regulatory standards and be very acutely aware of how the regulators are interpreting proper use of TDR.

So when you put those two things together, along with the value issues at renewal and income CRE, TDR is becoming a strategy we employ more often to make sure we get -- we minimize losses and minimize the time of loan, or the amount of balances remain in a nonaccrual status.

So TDR strategy would be employed where we have a right-sizing, and the borrower doesn't have sufficient cash to fully right-size the loan, TDR is often used as a strategy to do a restructure in that portfolio.

Our next question today is from Paul Miller with FBR.

Yes, thank you.

And just to follow up on that TDR question, if you addressed this, I missed it, but the level of TDR's, I mean how high have they gone, the loan modifications across the board, and are they also being employed in the CRE portfolios?

And the second question to that is what's your reserve methodology for the TDR's?

Sure.

TDR's are the strategy used across portfolios.

I just talked through the income CRE strategy.

The levels are going up.

And again, I don't have at my fingertips what our numbers are for third quarter, but certainly that will be in the call report data, so it will be publicly available.

And what about your reserve methodology?

Do you set aside reserves for your TDR's?

We are consistent with regulatory guidance on that.

So if a TDR results in a nonperforming loan that we follow the reserve methodology that is appropriate, whether it is FAS-5 or FAS-114.

It gets the same reserve model treatment as any other nonperforming asset, so it gets the same risk rating reserves, if it is not a specifically reviewed loan.

If it is a specifically reviewed loan, it gets either a specific reserve or a charge-down.

Our next question today is from Al Savastano with Fox-Pitt Kelton.

Good morning, everyone.

How are you?

Good, Al.

How are you doing.

Good.

Thank you.

Just given the quarterly results here and the balance sheet shrinkage, has anything changed your timing in terms of repaying TARP or a cash dividend, or deploying the excess capital?

I think in short, probably not.

I think we're on track with where we expected to be.

Our keys to repaying TARP have been to let a little more time pass, see stabilization in the economy.

We're generally pleased with the signs that we've seen over the last 90 days, the trends do seem to be positive.

As most folks, we still see a fair number of potential negatives that are potentially out there.

And we will evaluate that late this year or early next year, and make an appropriate decision at that time.

So I don't think there is anything that has really changed in our thought process around timing of CPP or dividends or anything of that at this nature.

Thank you.

Sure thing.

We will take our final question today from Craig Siegenthaler with Credit Suisse.

Thanks, good morning.

Hi, Craig.

First question really just on regulatory pressure.

I'm wondering if you think there will be additional regulatory pressure in the fourth quarter from maybe some or all banks to take excessive charge-offs and build reserves in the fourth quarter?

Really essentially speeding up the loss recognition process and leaving some losses behind in '09?

Craig, this is Bryan.

I don't have any sense whatsoever that that would be the case, no.

Okay.

Got it.

And then on the TARP repayment, are you seeing more pressure from regulators that TARP repayment may come sooner than some of us thought, especially for some of the banks looking to carry TARP for another two years or so?

No, I guess your question is somewhat grounded in the piece that was in "The Wall Street Journal" yesterday, but no, I haven't seen anything that leads me to believe that that would be the case, either.

It may or may not be, but I don't have any information that would substantiate that.

From our perspective, the regulatory environment has been very consistent and I think very -- in my view, very appropriate for the kind of environment that the banking system is operating in.

And we haven't seen any significant change in that over the last several quarters.

That does conclude our question-and-answer session for today.

Mr.

Jordan, I would like to turn the call back over to you for any additional or concluding remarks, sir.

Thank you, operator.

Thanks for taking the time to join the call today.

I would like to take a minute and let everyone know that Dave Miller is officially transitioning to a new role in our Company as head of retail banking in the regional bank, essentially returning to his roots.

As you all know, he has done a great service for our Company in very challenging times, and we appreciate his extraordinary efforts.

Thank you, Dave.

Thank you again for participating in our call.

I hope everybody has a great day and a great weekend.

Once again, that does conclude today's conference.

Thank you for your participation.