First Horizon Corp (FHN) 2009 Q4 法說會逐字稿

Good day, Ladies and Gentlemen and welcome to today's First Horizon National Corporation fourth quarter 2009 earnings conference call.

As a reminder, today's call is being recorded.

At this time I would like to turn the conference over to Ms.

Aarti Bowman.

Please go ahead, ma'am.

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 on the Investor Relations section of our web site at www.FHNC.com.

Before we begin we need to inform you that this conference call contains forward-looking statements which may include guidance involving significant 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 of the slide presentation available in the Investor Relations area of our Web site.

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

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

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

With that I will turn it over to Bryan.

Thank you, Aarti.

Good morning and thanks for joining our call.

Although challenging 2009 was a year of positive change for First Horizon.

Looking beyond our bottom line fourth quarter and full-year loss we made progress in executing our strategic plan to reposition First Horizon for consistent, significant and long-term profitability.

A healthy balance sheet is critical to long-term success, and we believe that 2009's actions materially bolstered our balance sheet.

We have substantially improved liquidity, our core deposits grew significantly last year, enabling us to reduce reliance on wholesale funding and retired debt.

Additionally our capital and reserve position is currently one of the strongest in the industry.

We continue to identify and aggressively deal with credit issues.

We increased our allowance to loans for the year, recognized problem loans, and wrote them down to net realizable value.

As a result are of the work performed on our loan portfolios, nonperformers and net charge offs began to decline in the second half of 2009.

In fact, nonperforming assets have now been steady to declining for three consecutive quarters indicative of the hard work and success of strengthened credit policies implemented and overseen by Greg and his very experienced team.

We reduced the -- excuse me.

We reduced risks by shrinking our balance sheet through the ongoing wind down of our National Specialty lending and mortgage businesses.

Since December 2007, we have reduced our National wind down loans by 40%, including an 85% reduction in our National residential construction portfolios.

As part of derisking our balance sheet, and as a continuation of efforts to exit noncore businesses, we sold $14 billion of mortgage servicing in 2009, our servicing portfolio is down from a peak of $108 billion to $40 billion at the end of 2009.

Competitive business model is also critical to long-term success, and in 2009, we focused on strengthening our core businesses regional banking and Capital Markets.

Emphasis on customer service helped grow our regional banks average core deposit 12% in 2009, relationship banking, and greater pricing discipline enabled the regional banks net interest margin to expand 15 basis points in 2009.

We remained committed to serving our core customers and made nearly $2 billion of new and renewed loans in 2009.

Soft demand, weak line usage, credit related actions, and normal portfolio run off led to a decline in loans outstanding over the course of the year however.

During 2009, we also implemented a new line of business structure in our regional bank to incorporate improved performance discipline, support consistent execution across geographies and increase scalability.

FTN Financial is an attractive business for us with high returns on capital.

In 2009, our Capital Markets business had an outstanding year.

Fixed income revenues were a record $600 million up 22% from 2008.

Fixed income revenues began to normalize in the second half of 2009 but remained very strong relative to historical levels.

During 2009, we also identified cost cutting and efficiency measures that we have already begun to implement.

BJ will provide more insight in a few minutes.

Turning to the fourth quarter on Slide four, we took several actions that negatively affected the bottom line, which should be beneficial over the long-term.

We exited a couple of noncore business locations and terminated contracts that had diminished in value as we exited our national businesses.

These actions resulted in a fourth quarter pretax impact of $31 million or 35% of our pretax loss.

Additionally, as part of our focused monitoring of credit issues, we increased our mortgage repurchase reserve, resulting in $59 million of expense, significantly driving up our environmental costs for the fourth quarter.

Credit quality trends which Greg will detail for you were encouraging.

Linked-quarter provision expense declined $50 million and charge offs declined $19 million and the allowance for credit losses was a strong 4.95%, despite a $48 million reserve decrease.

Our capital ratios ended the year on strong footing with tangible common equity to tangibles assets at 7.8% and Tier 1 common at 9.8%.

Consolidated net interest margin expanded 23 basis points from last year's fourth quarter levels as we concentrated on better pricing and growing customer deposits while the impact of nonaccruals lessened.

All in all, 2009 was a year during which we took major steps towards accomplishing our goals of returning First Horizon to sustained profitability and driving solid shareholder returns.

I will be back later for some closing comments.

BJ will now take you through the fourth quarter's financial results.

BJ.

Great.

Thanks, Bryan.

Good morning, everybody.

Let me quickly go over the quarter's consolidated financials on Slide six.

As Bryan mentioned our fourth quarter EPS was a loss of $0.32 after discontinued operations and we had a net loss of $71 million including $31 million in restructuring related costs.

As you can see, there were a lot of moving parts this quarter and so I will try to go over them in a little more detail in the next few minutes.

If you turn to Slide seven, our pretax, preprovision highlights by business, you can see our core businesses of regional banking and Capital Markets posted solid results, while high expenses in our wind down businesses as well as in our corporate segment negatively impact, impacted pretax preprovision.

You can see fourth quarter showed some positive trends in the bank and Capital Markets business with solid pretax preprovision earnings, good margin expansion, in the bank, good fee income, and reduced noninterest expenses.

If you look specifically at the regional bank our pretax preprovision earnings were up 42%, from the third quarter as expenses were lower including reduced foreclosure costs in the bank.

NII remains steady in the bank as well as the impact from lower loan balances was offset by improved net interest margin and in fact in the bank the margin expanded 17 basis points to 497 and average core deposits were up 4% in the bank.

In Capital Markets, our pretax preprovision earnings remained solid, and steady.

Fixed income revenues were slightly down from last quarter as the average daily revenues declined from to $1.8 million a day from $1.9 million, and commensurate with that expenses declined 5% due to lower variable comp.

Going forward, we expect continued positive trends in regional banking and further normalization over time in Capital Markets revenues.

Mortgage and National Specialty lending were significant drag on our consolidated earnings for the quarter with higher environmental costs from the mortgage repurchase reserve which I will give a little more detail on in a few minutes.

During the quarter, we took several actions to better position our Company for the long-term, contributing to a $32 million pretax loss that shows up in the corporate segment, and I will detail these items on Slide eight.

So if we turn to Slide eight, consistent with what we have talked about previously in our overall focus on driving efficiencies, as well as a review we undertook in 2009 of all of our businesses to better position us for sustained profitability going forward, we took several restructuring actions in the fourth quarter and you can see the pretax cash and noncash impacts shown on Slide eight.

First one we canceled a significant vendor contract that resulted in a $13 million charge.

We divested our First Horizon Insurance business in Atlanta, and we sold a nonstrategic remittance processing business.

Collectively these actions negatively impacted pretax income by $17 million, and included various other smaller charges these items totaled $31 million pretax impact.

And although these actions negatively impacted fourth quarter pretax earnings, they should improve our efficiency and performance over the long term beginning in 2010.

If you flip to Slide nine, total expenses rose nearly 12% from last quarter due to higher environmental costs and restructuring and efficiency charges.

These offset lower expenses in the regional bank that were down 9% and lower Capital Markets expenses which were down 5%.

In terms of our efficiency actions that we have talked to you about previously, we have now identified over $100 million in efficiency expense savings up from an earlier $50 million to $75 million target.

These cost saves will be achieved by streamlining operations, and improving processes.

In 2009, we have implemented about two-thirds of these actions, and expect the remainder to be fully implemented in 2010.

We are still facing significant environmental costs, which totaled about $73 million in the fourth quarter compared to third quarter's $47 million.

We incurred $13 million of foreclosure costs, and $59 million of expense related to our mortgage repurchase provision.

The addition to our mortgage repurchase reserves based on an increase in repurchase submissions we have seen coming into the pipeline, and slower resolutions in the existing resulting in higher estimated inherent losses.

We had $17 million of actual realized charge offs, in the fourth quarter, in repurchase, and the total mortgage repurchase reserve now stands at $106 million.

Going forward, we will continue to carefully monitor changes in the dynamics of this risk.

Going forward, overall, our operating expenses should come down as we focus on the efficiency initiatives, but the environmental costs which totaled around $250 million for all of 2009 are expected to remain sizable and volatile in 2010.

Flip over to Page 10, our balance sheet showed some positive trends this quarter.

National Specialty lending's loan portfolio shrank by another $500 million or so in the fourth quarter.

Our consolidated average core deposits increased 3% linked quarter, and during the fourth quarter we repatriated more than $400 million in wealth management customer deposits back on to our balance sheet.

Our consolidated net interest margin expanded, again 5 basis points to 3.19% from the third quarter as the average rate paid on core deposits decreased 11 BIPS and loan yields improved 9 basis points from last quarter.

Notably our weighted average cost of deposits is below 100 basis points now, 92 basis points in the fourth quarter.

And our wholesale funding has been reduced further.

In fact it has been reduced by about $4 billion other the past 12 months.

We believe the balance sheet in total is most likely near its low point and our balance sheet mix is asset sensitive which we believe gives us flexibility in the current rate environment, and benefits us if rates rise.

So to wrap up, I think the challenges are certainly not behind us.

But we believe there were a number of encouraging underlying fourth quarter trends, and as Bryan said we believe we are entering 2010 with a strong balance sheet.

We are making progress in building our core businesses, we have strengthened our net interest margin.

We are identifying and realizing productivity and efficiency benefits and as Greg is now going talk to you about credit quality is improving, the related costs are likely to remain elevated in 2010.

With that I will turn it over to Greg.

Good morning.

Our asset quality comments start on Slide 12, as an overarching statement asset quality improvements are gaining some positive momentum at First Horizon as most portfolios show signs of stabilization and progress in winding down the National portfolio continues.

Net charge offs decreased again in the quarter to $183 million.

The decrease was driven by lower losses in the consumer portfolios including one-time close, mortgage and home equity lending.

Commercial charge offs were flat overall with lower C&I losses offset by higher commercial real estate losses.

The loan loss reserve declined $48 million driven primarily by a decrease in reserves held for the one-time close portfolio due to better than expected disposition results.

The level of required reserves for the residential CRE and home equity portfolios also decreased in the fourth quarter.

At 4.95% of total loans our reserve remains high relative to peers but down somewhat from the 5.1% coverage in the previous quarter.

Provision expense totaled $135 million, a $50 million decrease from the third quarter, and the second consecutive quarter of meaningfully lower provision expense.

Turning to Slide 13, we experienced a third consecutive quarter of nonperforming asset reduction with NPAs down 14% on a linked quarter basis.

Nonperforming loan inflows slowed significantly while dispositions continue to increase and execute at close to carrying value.

NPL levels were down significantly in the one time close and residential prebooks and down marginally in the C&I and income CRE portfolio.

ORE balances were up $13 million, to $114 million.

This increase was expected and should be expected in future quarters as some portion of nonperforming loans inevitably cycle through the foreclosure process.

We continue to focus on minimizing the average age of our ORE inventory and keeping carrying values current as evidenced by our evaluation adjustments.

Single asset depositions continue to be made at or close to carrying value.

With respect to distressed loan and ORE management in 2010, we will continue to balance the dual goals and decrease problem assets while making the best economic decisions for our shareholders.

I will quickly go through the trends by portfolio beginning on Slide 14 with income CRE.

As expected charge offs were up from last quarter to $28 million.

While some charge off activity was associated with new nonperforming loans a significant portion was related to adjusting values on previously identified problems.

Income CRE nonperformers were down marginally in the quarter and the increase in accruing delinquencies influenced by one larger transaction.

Reserves were flat compared to the third quarter after being increased substantially in prior quarters.

We expect income CRE to remain challenging for the next couple of years with elevated levels of problem assets, reserves and charge offs but with a risk profile less severe than we were realizing on the residential CRE portfolio.

We feel with we are managing this portfolio proactively and have its credit risk profile properly assessed and adequately reserved for.

Moving on to Slide 15, we continue to see signs of stabilization in the overall C&I portfolio.

Delinquencies declined 29 basis points and nonperforming loans declined 23 basis points.

Excluding the bank and TruP exposures we saw an improvement in the weighted average risk rating in this book which resulted in incrementally lower required reserves.

C&I charge offs totaled $21 million for the quarter, $23 million lower than last quarter.

The decrease in charge offs was greater than our expectations due to the fact that no losses were taken on the TruPS or other bank exposures in the quarter.

On to Slide 16, we continue to focus significant attention on our trust preferred loan portfolio, on loans extended to bank holding companies, and on other loans secured by bank stock.

Due to the stress the financial services industry is under the risk profile of loans in these portfolios is assessed quarterly to insure proper risk management and the adequacy of reserves.

Here we disclose the risk profile of these portfolios and the level of reserves or low com associated with them.

Balances remained flat from last quarter.

We increased reserves for this book again this quarter in response to negative grade migration and management's qualitative assessment of the state of the industry.

Moving on to Slide 17.

Home equity balances were $6.9 billion for the fourth quarter, our core portfolio remained flat at $2.6 billion, and our National portfolio continued in slow run off, decreasing $171 million to 1 -- to $4.3 billion.

Charge offs decreased modestly from last quarter, to $52 million, and we decreased home equity reserves by $15 million in response to incrementally lower balances and delinquency trends moderating.

We expect home equity losses to remain flat to recent quarterly results in the first half of 2010, and decrease slightly in the second half of the year.

The home equity portfolio has consistently performed better than market expectations due to the higher quality characteristics of this portfolio.

We expect this stable performance to continue barring any further severe economic shocks.

On to Slide 18, you can see the National wind down portfolios remain on track, again this quarter balances declined almost $500 million, and required reserves decreased by $65 million.

OTC balances were down $130 million from last quarter and now stand at $230 million, with negligible undrawn commitments remaining.

Recall that two years ago, one time closed commitments were $3 billion, OTC charge offs were down $11 million and reserves decreased $48 million but remain substantial at 27% of loans.

National residential CRE balances were down $137 million from last quarter to $340 million.

Charge offs for the entire residential CRE book were above expectations, due to the continued write down of nonperforming loans as a result of declining collateral values.

The same issue that was is discussed earlier in our income CRE commentary.

Permanent mortgage balances remained relatively flat for the quarter despite some migration of completed OTC loans to this book.

While delinquency was up slightly we have seen positive trends in entry level roll rates and see deterioration in this portfolio moderating.

Charge offs were down for the quarter, however, we built reserves due to the increases in observed severities in problem asset dispositions, and the impact extended foreclosure periods are having on loss content.

We are proud of the progress we have made winding down the national construction portfolios and expect most of these loans to be worked through in 2010.

On Slide 19, fourth quarter in aggregate was a little better than expected from a charge off perspective but about as expected from a reserve perspective, although there was some variation from expectations at the sub portfolio level.

Overall, 2009 played out as we thought it might last January.

Assuming current economic trends continue, we expect a further trend of lower losses and lower acquired reserves in aggregate throughout 2010.

We do see the possibility of more quarter to quarter volatility in results however, as the portfolios most at risk, TruPS, bank exposures and income CRE tend to be less granular than the other segments of our portfolio.

Now I will turn it back to Bryan for some final comments.

Thanks, Greg.

In 2009 we made considerable headway in repositioning First Horizon, enabling us to refocus on our core businesses, and strengthen our business model.

Thanks to the hard work of our team, we were able to reduce risk in our balance sheet, get ahead of our credit challenges and improve our capital and liquidity.

In 2010 we expect continued progress towards reaching sustained profitability, but as BJ said the challenges aren't over.

The economic recovery is likely to be slow, and environmental and credit costs are anticipated to remain elevated although below 2009's level.

Nonetheless, we anticipate a gradually improving bottom line as we move through the year, assuming the economic recovery remains intact.

We have more work to do, deepening customer relationships, building on our core businesses and improving our operating efficiency, but longer-term I am increasingly confident in First Horizon's ability to consistently deliver solid, high-quality returns for shareholders.

Thank you.

Now, Operator, we will open the call for questions please.

Thank you.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

We will take our first question from Brian Foran with Goldman Sachs.

Good morning.

Morning, Brian.

Can I ask about the mortgage rep and warranty reserves and I realize you are limited maybe in what you can see given some of this stuff is in negotiations but any metrics you can give on sizing up the total potential liability or what are the specific areas of weakness and any kind of rescission rates and also there was a press release from the HUD out yesterday on FHA rescissions.

I guess the question there would be is any of that activity already reflected in your reserve or would that be incremental going forward?

Hi, Brian it is BJ, I'll take that one.

Mortgage repurchase we obviously look at that closely every month, actually, instead of for the quarter.

What we saw this quarter was higher inflows into the pipeline so higher put backs from our investors as well as slower resolutions coming out of the pipeline.

We have a done a pretty good job; we have a very experienced team that works these pretty hard but moving them through the pipeline does take a little bit longer and so with that, we have larger pipeline and therefore looking at both historical loss as well as what we think inherent loss could be from those.

That's how we set the reserve and we thought it was appropriate to increase the reserve fairly substantially for that.

In terms of the metrics we look at, we obviously look at the pipeline growth; we look at what's called the rescission rate, which is when a repurchase request is made of us, how often do we put it back to the investor so to speak.

That has remained fairly steady, and we obviously look at the severity of loss coming back in which has come down a little bit over the last couple of quarters but not alarmingly so.

Really most of our, most of our repurchase reserve increase was related to the increase in the pipeline.

Looking at it, we feel like we have, we have done a very good job working the repurchase.

We have done a very good job of building the reserve and being appropriately reserved for it.

If you look at our numbers, we actually had actual charge offs and losses of about $17 million or about $5 million a month, and we have a repurchase reserve of $106 million.

So, we feel like we have pretty good coverage on it.

Brian, this is Bryan Jordan, I will add to BJ's comment, we built the reserve substantially as we pointed out.

The thing that, that makes all of this difficult to estimate is there's no, there's no precedent or history that you can really rely on.

I think it is important to note that we originated our last mortgage in August of 2008.

So at some point that tail runs through, we have got about 16, 18 months of period where we have seen it come through the portfolio or through the pipeline, so we feel like we are getting closer.

But again, this is an area where without precedent it is very difficult to estimate the inherent loss.

If I could broaden the question to the other environmental costs, I mean I guess clearly they are a lagging indicator and it is positive that NPAs have turned the -- seem to have peaked.

Is there any historical perspective there in terms of what the -- if NPAs have in fact peaked, how many quarters or years would you expect environmental costs to remain elevated before those start consistently coming down as well?

Yes.

Brian, it is BJ again, I think what we expect is that, commensurate with asset quality improving, we expect those environmental l costs to come down.

If you look at where we think our long-term targets are for annualized provision based on the risk that we would want on our balance sheet, it will, it will take, you know, several years, three, four years for us to fully work through all of the elevated environmental costs that we have.

But again, we think that it incrementally steps down over time as, as our asset quality improves.

Thank you.

Thank you.

Our next question comes from Bob Patton with Morgan Keegan.

Good morning, guys.

In terms of expense lines and what we think the run rate is going be, obviously comp expenses were down a lot in the fourth quarter.

They can't stay down in this level but you identified another $100 million of which two thirds were already in a run rate at fourth quarter '09.

So how should we think about core expenses outside of what Bryan was talking about with the environmental cost?

Yes.

It is BJ.

I think you should look at those expense efficiencies we talked about, the $100 million as being in the run rate for 2010.

And you know going forward we expect to implement the rest and see a full impact of that $100 million going forward into 2011.

So if you kind of, I think we gave you what our entire 2009 environmental costs were, about $250 million or so.

Yes.

So, you know you kind of look at that, you look at our normalized run rates, less $100 million going forward into 2011.

That should give you a good idea of it.

Very helpful, BJ and one other question, Bryan.

Since BofA and the capital raises, we saw you guys in December.

What has changed in your thinking around TARP, have you talked with your regulators?

Is there any view that is changed or maybe more thoughtful in terms of how you maybe exit that in late 2010 or whatever?

I hope we are being thoughtful about it.

We have spent a lot of time trying to follow what's unfolded in the last month and a half.

We are very in tune with what's going on there.

We are in the process of discussing internally how we work with our regulators through what we consider a process to evaluate the right time and the right way to repay TARP.

I would hope that during 2010 we would make significant progress during that, in that regard.

So, we are evaluating it.

We are going to work with our regulators as appropriate, and I hope we make significant progress this year.

We will go next to Ken Usdin with Bank of America.

Thanks.

Good morning, everyone.

Morning.

You guys have clearly made some great process turning the corner on charge offs and the allowance.

I was wondering if you can help us try and understand a little bit about -- just about directional and magnitude -- now that we have seen some of these categories really starting to shrink as far as the National stuff, can you give us just a little bit of granularity in terms of how to understand the kind of progression from here as far as run off versus core charge offs and then the moving parts within the allowance as you continue to work that down as you go forward?

This is Greg.

I will take a stab at that.

I think it would be helpful to be on Slide 19, where we try again to give a view of what we expect and this time really more a year to year view.

We would like to say we will see sequential quarter to quarter decreases in charge offs and reserves and that would be what we would expect.

The issue with 2010 is that we are dealing with portfolios, the ones most under stress now tend to be less granular than the balance of the portfolio.

So from a quarter to quarter basis, we could have a surprise in one direction or the other, better than expected or worse than expected.

We think if we drew a trend line through 2010 it would be a regression line that decreased quarter to quarter through the year.

Again, we said this last quarter, we will say it again this quarter I think the improvement we will see will be incremental quarter to quarter.

We don't see a sudden turn about or any major release in any particular quarter but just steady improvement.

Okay, great.

That makes a lot of sense, great.

And then the second question just on the -- the balance sheet with regards to just maybe an update on balance sheet size and as far as obviously we still have a good amount of the National stuff to run down, but what are you seeing as far as loan demand if any at all and do you have an expectation of the point in time of which we will get to that kind of steady state for balance sheet size, especially the loan portfolio?

Ken this is Bryan, I will start, and then BJ can pick up on it.

We saw a fair amount of softness in the last half of 2009.

Things -- demand was incrementally better.

In the fourth quarter we think -- late fourth quarter -- we might have seen the stabilization point in demand.

We would expect that in the banking business, we have essentially bottomed out, in terms of the loan portfolio, and expect to see, based on demand, a little bit of growth in the first quarter, but it is still fairly anemic.

Both on the consumer side as well as the real estate side, C&I is a little stronger.

With respect to the aggregate balance sheet, we have seen the significant run off in the rapid portions of the National portfolios.

About $500 million decline this past quarter, a lot of that coming in our construction portfolios, income CRE, residential construction and one-time close.

We would expect that to be more stable.

So I would guess that the size of the balance sheet is going to be reasonably stable plus or minus this $26 billion level with a little bit of growth showing up in the bank in the early part of 2010.

We will go to our next question from Steven Alexopoulos with JPMorgan.

Good morning, everyone.

Morning, Steve.

Just a follow up on this question of magnitude on credit.

If we look at the year-end allowance we are up around $50 million from a year ago, would it decline back to where we were at year-end '08 around $850 million.

Is that a reasonable target to assume where we could head to, or is that, when you look at the trends, a bit on the optimistic side?

Steve, this is Greg just a point of clarification, are you -- as you are getting back to the 2008 level relative to where we will end -- be 12 months from now.

Yes.

I think -- I think our expectation is we will do better than that.

Okay.

In other words, the reserve level [we] will require this time next year will be something less than the '08 level.

Less than $850 million okay.

Just a second question quick.

It looks like your workout team is freeing up some capacity; could you talk about your appetite for FDIC deals here and should we be surprised if we get to the midpoint of this year and you haven't announced any?

Well, Steve, I would say that Greg and his team have made great progress and at some point they will free up some capacity.

We have probably got a little bit now.

We feel like we are capable of participating in a FDIC transaction.

I don't know that I would be surprised or not surprised.

I think you would sort of take what becomes available in term of opportunities.

And so we are going to be very focused on making sure that if we participate or don't participate we are doing it in a thoughtful manner.

So I wouldn't read too much into it one way the other.

We have got the ability to do it today.

We will think about it and look for the appropriate opportunities, but in the meantime Greg will keep the resources focused on continuing to work through the portfolio of problems that we are working on today.

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

Great.

Thanks.

Just on the balance sheet contraction or actually your comments about the balance sheet is stabilized from here.

I think prior guidance at one point was something like a $23 billion, $24 billion low point in terms of the balance sheet, I heard your comments you said loan demand was starting to stabilize but what was really the big driver in terms of your expectations that the balance sheet is going to stabilize $3 billion higher than where you guys had mentioned it before?

All right, Ken, this is Bryan, hope you are well this morning.

We have -- and that may be something that we have confused, because we talk about it a lot of different ways.

If you took, and I think the way you would get to the $23 billion is if you had said the National Home equity portfolio were gone today then you would be closer to that range.

It is, that is a portfolio that is going to take a little more time to work through.

So we have talked to -- the number that I recall us most using is around $25 billion, so somewhere between $26 billion and $25 billion is where I think it would bottom out over time.

Part of that is the National portfolios particularly the home equity is going be slower to run off and then when we start to see growth like we expect in the early part of 2010 in the banking portfolio it will offset some of that.

That's how we got to it.

It may be something we have confused and the various ways we have talked about it.

Understood.

The other question I had on commercial real estate.

You mentioned lower valuations were the primary driver of the losses this quarter.

Has anything changed with your methodology?

The way you estimate ultimate loss content on the CRE portfolios, just curious if this is something we should expect to see continue for the next several quarters or if this was due to some unusual or one-time adjustment?

Hey Ken, this is Greg.

The -- no we have not changed our methodology, in fact we have tried to be very, very consistent and make sure that we mark things on a quarterly basis to what we think the net realizable value is.

Really the driver of what we saw here in fourth quarter was some larger properties getting reappraised and values coming in, and a lot it was more land related, values coming in lower than would have been anticipated and going ahead and taking those marks.

So the extent appraised values -- we have seen a little bit of stabilization across commercial real estate, land continues to be an asset class that can hold some valuation surprises.

We haven't changed methodology; we continue to be diligent and take our medicine quarter to quarter.

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

Thanks.

Good morning.

Morning, Craig.

First, I just want to talk about the net addition to nonperforming loan trends which saw a pretty big improvement in the fourth quarter and even -- it was even a much bigger improvement than the early stage delinquency trends.

I am just wondering if you could talk about the drivers here and how you expect this level to trend into the first half of 2010.

Sure.

If you get behind our numbers, the portfolios that have most contributed to nonperforming loans have been one time close and our National Res CRE portfolios and those things as they wind down, there's less to flow in.

We also again talk about stabilization we have seen in the C&I book too.

We would anticipate that the net inflows would at this point continue to trend down over time; again it is going to -- [with] more volatile portfolios quarter to quarter there could be some changes in that, but I think overall we think inflows based on our portfolio will continue on a declining trend.

Got it.

And then just a second question really on the potential, and timing of deployment of excess capital.

Not to be too forward-looking, the return of cash dividends and buy-backs we can all assume is after the repayment of TARP but how can we think about M&A potential?

Is there any potential for you guys to look at deals in and around your footprint this year?

Craig this is Bryan.

The dividend question is going to be contingent upon a couple of things, one is return to profitability and two is the -- repayment of the CPP.

With respect to deploying capital, we will be very focused in how we deploy capital; we have got a strong bias that we want to do it in a smart fashion.

We want to be deployed in a way that we can produce very strong returns; we have talked about based on our expectations of normalized capital levels producing 15% to 20% returns.

The M&A environment in my view is likely to be largely an FDIC driven process for the next several quarters.

I think that the regular way to market as I would define it would be more likely late 2010, early 2011.

So I think in the meantime we will continue to work on growing the customer business, work on winding down these National businesses.

If FDIC opportunities happen to present themselves in and around our marketplace, we will consider that, and I think the regular way markets will come back it is just going be another several quarters before we get to that point.

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

This is actually Rob from Matt's team.

Good morning.

Hey, Rob.

Most of my questions have been answered but on the NIM, continue to increase up 5 basis points quarter-over-quarter but the rate of increase is more modest [than] the past few quarters.

How should we think about the magnitude of NIM increases in 1Q, 2Q of next year?

How much can continue to reduce funding cost, specifically repricing some of your CDs?

It is BJ, I will take that one.

We have been pretty pleased with what we have seen on NIM expansion throughout 2009.

I think going into next year, we do see the opportunity for further improvement in the NIM but it will probably, probably be modest, reason being is that as you mentioned we have gotten much improved funding costs particularly on weighted average rate paid for deposits.

We will probably see incremental improvement in that as we allow CDs to run off and that will certainly help, but we are getting close to the point where there's just a natural floor on it.

So that will be tougher to improve.

We have also been pretty pleased with what we have seen on improving loan yields, but again that takes a while to work through the portfolio.

So I think now we are getting to the point where we have taken a lot of the organic steps so to speak to put us on the right track for sustained improved NIM but going forward we will probably need a little more help from the rate environment.

Meaning as rates rise, we think that's when we will start to see more NIM expansion over time but until then it will probably be much more modest than you have seen the last couple of quarters.

Our next question comes from Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Morning, Kevin.

Most of my questions have been asked and answered already.

Just one quick clarification on the mortgage banking repurchase provision, line item.

Obviously, that jumped up this quarter and you guys have talked about that but just looking forward, should we view that as somewhat of a deliberate true up of that reserve this quarter, and not necessarily look at that amount as a run rate over the next few quarters.

And should we more look at the last couple of quarters as more of a run rate in trying to forecast earnings?

Yes.

This is BJ; I will take a crack at that.

Again I don't know if we necessarily change quarter to quarter how we look at it.

We look at historical loss rates, inherent loss rates, what's coming into the pipeline et cetera.

So, at this time, we thought that was the most prudent thing was to build the reserve fairly substantially over the last couple of quarters.

As Bryan said, we haven't originated a loan for sale since the third quarter of 2008.

So we do think at some point the inflows will drop and could stop fairly rapidly.

But you know, I would be surprised if we saw that magnitude of increase, unless the environment got significantly worse than where we sit today.

Okay.

Thank you.

Tony Davis with Stifel Nicolaus.

Gentlemen, all of my questions have been answered.

Good progress, Bryan.

Thanks, Tony.

Appreciate it.

We will go next to Jefferson Harralson with KBW.

I have one more (inaudible) warranty reserve question.

What's the amount of the loan you sold, or said another way, the $106 million, what is that in basis points of the amount of loans that could come back to you?

Jefferson, this is Bryan, it is $100 billion plus number of loans that we sold, but I commented earlier, one of the difficulties in estimating these reserves is not having any precedent form and as BJ and I both have pointed out we originated our last loan in August of 2008.

One of the factors intuitively believe is that a problem that is based on fraud or a misrep is going to surface earlier in the cycle.

If something performs for an 18 month period or thereabouts it may be something other than a fraud or a misrep but there's a strong incentive for a lot of these loans to be pushed back to the originator, particularly on a rep and warranty claim, and force us to fight our way through the rescission process, so there's not a lot of good history.

As BJ pointed out we lost roughly $5 million per month in the fourth quarter; $17 million, I think was the number.

We increased our reserve by about $45 million in the quarter, taking it from roughly $60 million to $106 million.

So, that is a long way of saying there's not a lot of history.

We think that we are getting a lot of the potential volume through the pipeline in 2009.

We are not sure quite where it goes in 2010, but we will stay on top of it and we will continue to evaluate it.

We -- it is one of those areas it is going to evolve over time.

So is it a better question to ask what percentage of the loans that have gone NPA in your buyers' portfolios, are they finding some kind of technical issue with, and you are having to pay on?

Is that a better way to think about that?

I think, it is BJ, I think most of what with we see, not all, but most, are when loans are delinquent that is when the investor will certainly put it back.

So that is most of the volume that we are seeing.

We have seen an increase from our largest investors in terms of really trying to work their books to find anything they can to put back, as Bryan said.

So we are working with them and trying to size it as best we can.

One other thing I will mention on Bryan's -- what he said about what we have originated -- as you obviously know, once it is refied away from the investor, we don't have further rep and warranty on that, so as we try to look at total inherent loss content it is not quite as easy as saying how much did we originate and so on.

It is a little more than that, and we do a heck of a lot of work to try to pinpoint as best we can, but it is as much an art as a science.

To your point, Jefferson, if there is a loss inherent in a loan, it is likely to be pushed back to press say a rep and warranty claim and that is not just a First Horizon question, that's an industry-wide issue that we are all going through for what seems to be the very first time in a large scale basis.

Our next question comes from Matt Burnell with Wells Fargo Securities.

Good morning.

As other folks have said most of my questions have been asked and answered but I have a couple of administrative details I want to ask about.

First of all, in terms of your comments, Greg I think it was, in terms of the commercial real estate losses were -- seem to be more related to land exposures.

Can we infer from that the nonland exposures are actually performing maybe in line with your expectations or maybe a little better than your expectations at present?

Matt, I think on looking at our Slides for income CRE is Slide 14.

In terms of performance by category you can see there on the bottom right, land is clearly the worst performing asset class.

My comments earlier around the losses that were realized in fourth quarter, about two thirds or so of the losses that we experienced were related and that's a rough estimate, to reassessing values of existing nonperformers rather than new inflows, and the larger contributor there is where there's land, because the values have dropped more precipitously on that.

You can see the category performance by other income CRE types, and I think we are safe to say we are elevated across the board.

We are concerned about all of income CRE.

I think where we get comfort in terms of our guidance as to loss levels and reserve levels in 2010, is we have pretty aggressively or appropriately migrated grades downs or loans down through the grading process in 2009, built reserves for those loans.

The balances are decreasing.

So we think we have got things set for pretty stable performance in 2010 relative to 2009, but again this is a portfolio that we don't see marked improvement for the next couple of years.

As -- and I think that would be consistent with an industry view.

We will go to our next question from Christopher Marinac with FIG Partners.

Thanks, BJ and Bryan I noticed there was some growth in the [period] loans for Capital Markets.

Was curious if this was an anomaly or is this an area of potential growth as the balance sheet stabilizes?

Yes.

It is BJ.

I think that the growth was (inaudible) and so that is virtually all of the (technical difficulty).

That is -- as you know, the mortgage warehouse lines; usage of those varies pretty significantly quarter to quarter depending on the rate environment.

So it wasn't a lot of new commitments being made.

It was utilization because of rate environment on existing commitments.

Greg, is there any geographical focus on the C&I growth we saw at period end?

The C&I growth you saw at period end in fourth quarter was almost exclusively the mortgage warehouse line utilization, about $200 million increase.

We did see sort of as an overall comment or C&I comment, slight uptick on line utilization in C&I in fourth quarter, and sort of in line with what you are hearing [in] the industry about rebuilding inventories.

It was modest, but there was some improvement in utilization.

We will go next to Erika Penala with UBS.

Good morning.

My first question is a clarification surrounding the reserve, Greg, since any incremental new NPL inflows will likely be lower severity, how comfortable are you and at what floor are you willing to lower the reserve coverage ratio to NPLs in 2010 relative to what we've seen over the past couple of years.

Erica, this is Bryan.

The first part of your question got cut off for some reason here.

Would you mind repeating it?

Sure.

Again, it is surrounding the reserves.

I was just wondering, since any net new NPL inflows will likely be on lower severity products, I was wondering how comfortable are you bleeding down your reserve coverage ratio to NPLs in 2010 from where you have been reporting it over the past couple of years?

I'll start and Greg can pick up on it.

It's going to depend on portfolios.

If you look at some of these National portfolios one-time close, we have got reserve coverage that is 26%, 27% and the Bank Trust preferred portfolio, bank loans we have got about 17%.

(technical difficulty).

The construction is likely to be gone throughout 2010, so we would expect to see those come down.

I would guess on our commercial real estate loans where we have got something like 8.6%, 8.7% reserves, they will likely remain elevated for a period of time.

With the improvement we have seen in C&I and some of these other portfolios like home equity, home equity where we reduce reserves slightly this quarter, there's a chance they will come down throughout 2010.

So, as Greg said, to the question earlier, we expect to see reserve levels trend down in the aggregate across 2010, and as we have said in the past over time, we migrate back down to a reserve level that is probable in the 2% or less range.

I will just tag onto that.

I think you have probably heard us bristle before at reserves to NPLs, because so much of our portfolio is real estate dependent because of the National portfolios and we have gone ahead and marked the loss content and taken the losses.

So we did see that coverage ratio reserves to NPLs increase here in fourth quarter but we still think that is probably not based on our portfolio, the best ratio to look at.

To Greg's point a big portion of those nonperforming assets have been written down; I think it is about $290 million of charge offs, roughly 40% on that piece of the portfolio.

I think there is a graphic in the deck.

That does conclude today's question-and-answer session.

I would now like to turn the call back to Mr.

Bryan Jordan for any additional or closing remarks.

Thank you, operator.

Thank you, everyone for joining our call.

We appreciate your time and your interest.

Please don't hesitate to follow up if you have any other questions that we may be helpful on.

Aarti will be available and any of us will be happy to help if at all possible.

Thank you all and hope you have a great day.

Bye-bye.

Once again that does conclude today's conference call and we thank you for your participation.