First Horizon Corp (FHN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation first quarter 2010 conference call.

(Operator Instructions)

I'd now like to turn the conference to your host, Ms.

Aarti Bowman.

Thank you, operator.

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

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

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

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

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

With that I'll turn it over to Bryan.

Thank you, Aarti.

Good morning and thank you for joining our call.

First quarter results showed continued progress toward returning to sustained profitability.

We significantly narrowed our bottom line loss, further de-risked our balance sheet and made headway in positioning the Regional Bank to take full advantage of an economic upturn.

First quarter's net loss of $0.12 per share was a notable improvement compared to fourth quarter's loss.

As you can see on slide three, Regional Banking and Capital Markets produced solid results, although factors such as higher compensation expense and increased foreclosure costs negatively affected linked-quarter comparisons.

Our non-strategic businesses' impact on results declined because of our proactive approach to credit issues.

As non-performing assets and our outlook for credit continued to improve, we were able to reduce provision expense for the fourth consecutive quarter.

Provision expense declined $30 million from last quarter to $105 million as non-performing assets and charge-offs continued to gradually improve.

Additionally, while still elevated, environmental costs improved linked-quarter.

Although they can be volatile, we're encouraged that first quarter's environmental expenses dropped $21 million from fourth quarter's level.

We remain dedicated to improving First Horizon's credit quality and reducing related costs to normal levels.

This is critical to returning to sustained profitability.

Capital Markets will continue to be a high return on capital business for us.

We are also increasingly focused on building our bank and positioning it so that it has the people, product capabilities, procedures and infrastructure to profitably grow revenue as the economy picks up.

For example, in recent months, we have taken advantage of the opportunity to hire additional experienced lenders in our footprint.

These lenders are creating new customer relationships and, along with our overall group of talented lenders, helping us deepen existing relationships and actively pursue additional creditworthy borrowers.

During the first quarter, our bankers made more than 100,000 calls to customers and prospects.

While we have seen some encouraging signs that customer activity is picking up, overall loan demand remains soft with paydowns, runoffs, and credit-related actions still more than offsetting new bookings.

But once demand improves, and it will as the economy recovers, we'll be set to prudently grow our loan portfolio and related revenue.

Customer retention rates remained industry leading and consolidated average core deposits increased 4.5% from last quarter, suggesting we're well-positioned to fund an eventual upturn in loan demand.

All in all, I feel good about our ability to grow revenue as the economy turns up.

BJ will now take you through the financial results for the quarter, and I'll be back as we take your questions.

Thanks, Brian.

Good morning, everybody.

On slide five, you can see, as Brian talked about, our net loss narrowing to $28 million with an EPS loss of $0.12.

Lower provision and lower expenses were the main drivers, which I will discuss a little bit on the next slide.

And as we turn to the next slide, a quick reminder for you on slide six, as you saw last week, we modified our segments to better reflect ongoing focus on our regional banking and Capital Markets businesses.

Key changes again included the addition of the non-strategic segment, which combines the former Mortgage Banking and National Specialty lending segments, as well as the TRUPS portfolio.

Correspondent Banking has been moved from Capital Markets to regional banking, and, third, regional banking now includes first lien mortgage production within the footprint.

And just as a reminder, the new segment structure is shown in the appendix if you want to take a look at that.

Again, in first quarter 2010, the regional bank booked pretax, pre-provision earnings of $47 million, down from 4Q '09's levels.

First quarter results were negatively impacted by seasonality from lower NSF fees, as well as higher compensation expenses.

However, the bank showed some solid trends as average core deposits were up 8%, benefiting from our continued success in repatriating customer deposits through our wealth management group, as well as the seasonal build-up during tax season.

Our Capital Markets business showed pre-tax income of $33 million with continued strong average daily revenue of $1.7 million, down just slightly from last quarter's $1.8 million.

Expenses are up linked-quarter due to the resumption of a normal rate of incentive provisioning and a seasonal increase in FICA expenses.

Although we have seen normalization within fixed income, revenues are still strong compared to historical levels.

In our corporate segment, we had pre-tax income of $11 million, compared to last quarter's loss of $15 million.

The improvement was driven primarily by a debt repurchase gain and a termination of related hedging relationships totaling a $17.1 million number, as well as lower repositioning costs.

In our non-strategic segment, lower mortgage repurchase provision expense, which I will cover in a minute, as well as lower repositioning costs contributed to the significant decline in loss there.

If we turn to slide seven, talk a little bit about expenses, consolidated expenses were $343 million, down 12% from 4Q '09 driven by those lower non-strategic segment costs, a decline in environmental costs and reduced repositioning costs from the fourth quarter.

Repositioning charges, mainly from the shutdown of our institutional equity research business, were $11 million compared to $31 million in fourth quarter of 2009.

Moving onto slide eight, environmental costs dropped to $52 million this quarter from 4Q '09's $73 million driven by lower foreclosure and mortgage repurchase provision expenses.

Foreclosure costs declined 20% linked-quarter or to about $10.5 million from $13 million.

The mortgage repurchase provision fell to $41 million from the prior period's $59 million.

Although environmental costs were down in the first quarter, they still remain elevated, specifically relative to our mortgage repurchase requests.

Related net charge-offs were $20 million, and we increased the reserve by about $20 million in the first quarter or to about $126 million due to the increase in the aggregate size of the pipeline.

The pipeline of requests ended the quarter at $304 million, compared to year-end 2009's $260 million.

Our recission rate is about 40% to 50% and remains there and is held constant from previous quarters as has loss severity.

As a reminder on our process here, when we repurchase a loan, it is marked down to fair value and classified as held for sale and the majority are categorized at nonperforming or the investors made whole for the losses incurred.

Currently, 17% of the pipeline is from '06, 60%, the vast majority is from '07, and 14% from 2008.

As you know, we sold our national mortgage origination platform in August 2008 and ceased national origination at that time.

Though the new requests pipeline was down slightly this quarter, MI recisions have increased and could present additional uncertainty.

We'll continue to closely monitor environmental costs and expect continued volatility.

So, if you turn to slide nine and talk about first quarter balance sheet trends and margin, loans in our non-strategic segment shrank 3% or $200 million as we continued to take actions to de-risk our portfolio.

As Bryan said, loan demand remaine soft, but we're seeing a few encouraging signs.

Line utilization, although at a low level, has seemingly stabilized, and the pipeline for corporate and asset-based lending activity in particular, is actually pretty good.

But keep in mind that typically we don't see net loan growth resume until we're several quarters into an economic recovery, so while we are pleased with the calling activity of our bankers, we are realistic in our outlook for meaningful growth.

Consolidated average core deposits were up 4.5% reflecting positive customer trends in the regional bank.

Notably, our loan to core deposits ratio improved to 114% at the end of the first quarter from 4Q's 122 and a year ago 149% and our funding mix continues to improve with low cost core deposits now representing 96% of total deposits.

Loan pricing continues to improve.

Spreads in the regional bank were up 12 basis points from 4Q '09 and 75 basis points from a year ago reflecting better pricing ability.

Also, our bankers are now more engaged in implementing rate floors in our commercial loan portfolio.

First quarter's consolidated net interest margin was unchanged linked-quarter at 3.19% but up 30 basis points from a year ago.

The regional bank's NIM was a strong 496, up about a basis point linked-quarter.

And we do not expect much margin expansion until interest rates start to move higher.

In summary, first quarter showed steady progress towards our return to sustained profitability.

Our balance sheet remained strong with a TCE to TA at 7.7%, a Tier 1 common improved to Tier 9 at 9.9%, net interest margins stable and expenses declining.

Our ongoing focus on profitably expanding our customer base, as well as deepening existing customer relationships, should position us well for renewed revenue growth as the economy improves.

Now Greg will take you through the credit trends.

Greg.

Thanks, BJ.

I'll start on slide 11.

In the first quarter, net charge-offs were flat fourth quarter overall, but a little better than they look.

Charge-offs were previously off balance sheet, home equity and permanent mortgage loans now flow through our charge-off line rather than being accounted for within their respective securitizations.

These additional charge-offs totaled about $3.5 million for the quarter.

We also took $13.5 million in losses because we accelerated charge-off recognition in the permanent mortgage portfolio.

This was provision expense neutral.

Reserves decreased $53 million, driven primarily by reserve releases in the OTC and permanent mortgage portfolios.

We had a modest, just over 1%, reserve build in the commercial portfolios, driven by an increasing mix of individually impaired credits for which holding reserves, as opposed to immediately charging down, is the appropriate action.

Despite the overall reserve decrease, we remain well reserved versus industry peers and are comfortable with the level of reserves we hold relative to the inherent risk content we see in the portfolio.

Moving on to slide 12, nonperforming assets declined 17% year-over-year and we saw a modest decline linked-quarter reflecting the fourth consecutive quarter of NPA decline.

The decrease in the quarter was driven by continued progress in the OTC portfolio where nonperforming loans declined 47%.

Offset by NPL growth in the home equity and permanent mortgage portfolios due to increased loan modification activity and commercial portfolios due to continued deterioration and financial services related exposures and soft landing strategies in commercial real estate.

Soft landing is how we refer to situations where we're able to restructure certain real estate loans with viable long-term customers.

However, the restructure results in non-accrual status per regulatory guidance.

Nonperforming levels decreased over the quarter, but at a slower rate than our exceptional fourth quarter results.

In-flows edged up, largely due to two additional trust preferred interest deferrals, deterioration and bank related exposures, and one large soft landing relationship in the bank.

Outflows declined from very active fourth quarter levels.

ORE in-flows slowed and our overall level of ORE remained flat to last quarter.

Valuation adjustments, which are ongoing marks to ensure our carrying values remain reflective of market values, decreased during the quarter; a positive reflection of our diligence in this area in past periods.

For the past several quarters, we have said that we expect the mix of our NPAs to shift a bit and include proportionally more ORE relative to nonperforming loans than has been the case in recent periods.

Lengthening foreclosure processes have pushed this event out somewhat, but we now expect ORE levels to peak during the second and third quarters of 2010, then begin a gradual decline.

Now I will give you a little color on each of our major sub-portfolios starting with our income CRE portfolio on slide 13.

This portfolio remains stressed but is exhibiting some stability with both delinquency rates and nonperforming balances flat to fourth quarter.

Charge-offs were down $9 million to $19 million, but we expected some quarter to quarter volatility in this portfolio, so no trend should be inferred yet.

Reserve levels decreased slightly as balances declined.

We continue to see some deterioration in the risk profile of this portfolio, but at a decreasing rate compared to 2009.

Land exposures, retail properties and apartments remained the poorest performing property types in the income CRE portfolio.

In summary, we feel that we have the risk in this portfolio well identified and that we're adequately reserved.

We continue to expect industry-wide conditions for income CRE to remain stressed over the next 18 to 24 months.

Moving to slide 14, recall that our C&I portfolio is a diversified granular portfolio of loans to many different industries, but it also houses our exposure to the financial services industries including loans to bank holding companies which represent 3% of this portfolio, and trust preferred loans which represent 7% of the C&I book.

Remember also that in our new presentation format, essentially all of the core C&I is housed in the regional bank segment along with bank related exposures.

Trust preferred loans are now accounted for in the non-strategic segment.

I will first speak to the core C&I portfolio where the portion of the book that excludes trust preferred and bank related exposures.

Conditions in this book are stable to improving, although charge-off and non-accrual results for first quarter appear to contradict this statement.

Indicators of improvement include an improving weighted average internal risk rating of the portfolio, improving watch list trends, increased upgrade activity, stable delinquency and positive field-level intelligence.

Overall C&I charge-offs increased from $21 million in the first quarter to 28 -- from $21 million in the fourth quarter to $28 million in the first quarter.

However, $19 million of first quarter charge-offs were bank related while none of the fourth quarter's were.

Core C&I charge-offs actually decreased for the quarter.

C&I nonperforming loans rose in the first quarter even for the non-bank related exposures.

We do not think this is a long-term trend for core C&I, but rather is reflective of the continued deterioration of credits to weaker companies that are not seeing the same positive trends as better positioned ones.

It is important to note that an increasing number of our nonperforming C&I loans remain current on principle and interest payments and are judged to be impaired due to an inability to demonstrate a continued capacity to maintain their historic payment record.

Reserve levels for the core C&I portfolio increased because the impairment assessment methodology employed for the majority of troubled C&I assets typically calls for holding reserves for errant losses, rather than immediate charge down process typically followed when troubled assets are collateral dependent.

With respect to trust preferred and bank related exposures, you'll find more detail on slide 15.

As expected, these portfolios continue to show very significant stress.

In the first quarter, we had two additional banks elect interest deferral on their trust preferred loans for a total of six financial institutions now on deferral totaling $64 million.

As I just noted, $19 million of our $28 million of first quarter C&I charge-offs were associated with our bank related loan portfolio.

We continue to be vigilant in management of these portfolios and prudent with our reserve coverage which stands at 17.25%.

Given the fact that many of the loans in these portfolios are to strong, profitable operations, we are very comfortable with this level of reserve.

Expect continued deterioration and potential quarter to quarter volatility in reported results for this book.

On slide 16, you will see that home equity portfolio delinquency trends are stable to improving, particularly in the regional bank, and that nonstrategic balances continue their slow runoff.

Note about $200 million of home equity loans that were previously accounted for in an off balance sheet securitization began to be accounted for in the non-strategic segment in January.

This caused a small increase in delinquency as that book performs worse than the balance of the portfolio.

The primary external driver of the delinquency remains unemployment.

Underlying origination characteristics that drive performance remain vintage, origination channel, credit score and lien position.

Slide 17 provides an update on the major components of the non-strategic portfolios.

One-time closed balances are down to $105 million as we near completion of a very successful wind down of this book, whose commitments totaled $3 billion at the beginning of 2008.

Balances in the permanent mortgage portfolio are expected to decline from this point forward, as the in-flow of a portion of the performing completed OTC loans ceases.

Delinquency trends are improving, and the level of required reserves at quarter end decreased as a result.

Nonperformers were up due to increased loan modification activity and because the foreclosure process is becoming extended in many geographies.

We accelerated loss recognition practices in this portfolio during the quarter resulting in a $13.5 million increase over what losses would have been without this change.

Progress continues in winding down the nonstrategic residential CRE or homebuilder portfolio with commitments down 86% since announcing our exit from this business line.

Charge-offs and nonperforming balances decreased in this portfolio during the quarter.

Wrapping up on slide 18, our first quarter results, with respect to losses and reserve levels, were largely as expected and our expectations for 2010 remain intact.

We will experience an improving trend, meaning lower losses and required reserves, as we progress through the year.

However, there is potential for quarter to quarter volatility, due to the lumpy nature of our most stressed portfolios.

This expectation does assume, however, that the current economic trends continue.

Now I will turn the call back over to Bryan.

Thank you, Greg.

In closing, I am very confident that the steps we have taken, and continue to take, position us very well for the future.

Thanks to the hard work of the First Horizon employees, we're successfully executing on our strategy to achieve attractive long-term returns for our shareholders.

With that, Operator, we'll now take questions.

(Operator Instructions) And our first question comes from Paul Miller of FBR Capital Markets.

Your line is open.

Yes, thank you very much.

Can you address a little bit about the fixed income?

You say some of these big shops report really strong fixed income results, and I was just wondering if you could add some color?

Did you put more capital, take capital away from that trading desk over the quarter?

Paul, good morning, this is Bryan.

Our fixed income business, the trading portfolio grew actually a little bit, so I guess in an absolute sense you would say we allocated a little bit more capital to the business, but not a significant amount.

Our business is strictly a distribution business.

We don't run a proprietary trading business, so we looked at our volumes in the first quarter very favorably.

We thought that the business was, although normalizing, very strong, we're pleased with the results and felt very, very good about the efforts of the team there.

Thank you very much.

Sure.

Our next question comes from Craig Siegenthaler of Credit Suisse.

Your line is open.

Thanks.

Good morning, everyone.

Good morning.

Good morning.

First, just on the increase and additions to NPLs, we watched this level improve fairly rapidly the last two quarters and now we're seeing a little bit of a step back here in 1Q.

Do you believe the overall pace of credit quality improvement now is slowing now that the distressed portfolios are really reduced or do you think much the pickup in additions we are seeing today are unusual coming from lumpy TRUP and bank related C&I exposures?

Yes, Craig, I'll take a stab at that.

We certainly enjoyed the decrease in nonperformers we had in the fourth quarter more than we did here in first quarter, but we do see it more as an anomaly than a trend.

We continue to expect to see fourth quarter improvement, and quite frankly at a little better pace than we saw this quarter.

This quarter was influenced by some lumpiness, particularly we talked about soft landing relationship, that was pretty sizable relationship.

We opted to take a strategy with that long-term customer that was the appropriate thing to do, but per regulatory guidance needed to be called a nonperforming loan.

It was an increasing number of nonperformers that are current on principle and interest, so there's a number of factors driving first quarter results.

I would expect a better pace going forward, just some anomalies in first quarter.

Can you help us quantify at all the pickup just driven from the TRUP, the bank related C&I and from the permanent mortgage just on the impact to the in-flow to or the addition non-accrual?

Yes.

Trust preferred was around a $20 million increase.

Another major driver was that soft landing relationship and aggregate.

That was about a $30 million increase that accounts for a big part of why we saw what we saw this quarter.

Great.

Our next question comes from Ken Zerbe of Morgan Stanley.

Your line is open.

Thanks.

First question I had, just in terms of the -- this is on slide 12 the ORE dispositions, it looks like that's been slowing.

Do you have any comments on that?

Is it getting harder to sell?

Are you not finding attractive prices, or is this just a function of somehow of the portfolio?

Yeah, Ken, I will take a stab at that one, too.

Actually we're quite happy with disposition activity in the first quarter.

We did have less in-flow and we were able to keep overall ORE balances flat.

Our disposition activity in first quarter I think was very successful.

Within the bank, excluding the mortgage company, moved about $35 million of ORE, about $117 million -- about 117 individual properties, and we had less than $100,000 loss on that move of $35 million, so we are able to move properties.

We do have them marked appropriately.

I am pleased we're able to keep that number flat quite frankly.

All right.

And then the other question I had on page 11, the reserve release that you have been posting obviously an increasing amount.

I understand there was some lumpiness given some unusual items this quarter.

But when you think about the reserve release going forward, is it reasonable to assume given -- let's call it very elevated reserve ratio, that the dollar amount of reserve release should continue to accelerate or would you expect that to stabilize as commercial continues to weaken?

Yes.

I think that there's a subcomponent of commercial that continues to weaken, and that's the bank related.

I think our core C&I is stable to improving based on all of the leading indicators in our portfolio.

Getting back to the relative level of reserve release, I think a lot of what we've had in the past quarters has been driven by the OTC portfolio which we had fully reserved for what we thought the inherent loss content for well over a year now, so that's provided release.

I think going forward there will be less of that but we'll see a pickup in release from the commercial portfolios as their profile improves.

And I think the net of that is, at least expectation in my mind, that the releases will be sort of on the level we've seen the past couple quarters.

I think BJ would push and say they might be a little better than that, but I think having a range of what we've seen the past couple quarters is reasonable going forward.

Any comments, partner?

Sounds good to me.

Our next question comes from Steven Alexopoulos of JPMorgan.

Your line is open.

Good morning, everyone.

Good morning, Steve.

I wanted to start looking at the trend line of the repurchase request on slide eight.

It would seem this quarterly provision for this item will probably continue to trend up for the year.

I am just wondering, is 200 million or somewhere around there a reasonable estimate for to us use for the full year for this?

For the -- Steve, do you mean for the ending balance of the reserve?

I am talking about for the provision, it was 40 million this quarter, is 200 million a good full year estimate?

Well -- it is BJ.

It is hard to say, right, because we look at it every quarter and see what our in-flows are and how our loss mitigations are going.

We thought this quarter was prudent to again build the reserve based on the aggregate sides of the pipeline.

What I might say, though, is that where the last two quarters we've seen virtually all negative trends, I would say that we have seen a little bit of some mixed trends this quarter.

Which doesn't mean that it is getting better overall, it just means we have a few more things that have been encouraging, though the negatives still outweigh the positives.

So, for instance, if you look at 4Q '09 to 1Q 2010 on slide eight, our new requests are actually slightly down.

The mix of those requests has changed a little bit, meaning more towards MI recissions, which could pose additional losses to us, but that's actually a cautious positive trend.

We also have a lot more focused loss mitigation efforts than even we had in the past to make sure that we are pushing back as much as possible.

So it's kind of hard to predict.

As we sit here today, we feel like we have a pretty good reserve relative to what the inherent loss content is in the pipeline, plus trying to look forward a little bit.

So we'll just continue to monitor it as I said.

Steve, this is Bryan.

I'll add to BJ's comment.

This is somewhat uncharted territory.

But the other two factors to keep in mind as you look at our costs are, one, by August of this year it will be two years since the last time we originated and sold any of these loans, and to the extent that housing prices and the economy -- housing prices have bottomed that unemployment has peaked and maybe started to decline, that should have an impact on the defaults in these mortgages.

So those two factors coupled with the things that BJ cited give us some confidence that we're starting to see some slight encouraging signs, but we think it's going to be a cost that we'll incur some amount of for the rest of this year and as I said it is somewhat uncharted.

Maybe just one other question.

Looking at capital levels, they're very strong, and you're also generating lot of capital each quarter.

What's the game plan for deploying some of this?

Are you looking at restoring a cash dividend, acquisitions?

Right now we're trying to build capital and make sure that capital is adequate for this cycle and as we signaled in MPAs, we're seeing improvement in credit quality and improving trends there.

We think the economy is getting better.

We think there will be plenty of opportunities to put capital to work as loan portfolios start to grow.

Organic growth, we think there are likely to be opportunities in the M&A environment late in 2010, early in 2011.

But for right now, and ultimately when we return to profitability there will be a time to re-establish our dividend.

But for right now, we're comfortable letting the capital positions remain very strong and we'll take advantage of opportunities to deploy that capital when the economy turns later this year.

Our next question is from Brian Foran of Goldman Sachs.

Your line is open.

Good morning.

Good morning, Brian.

Just to follow up on that last M&A point you made about opportunities late in 2010 and early 2011.

Is that timeline dictated by when you're comfortable deploying capital or is that dictated by when you think the opportunities will emerge?

And also could you differentiate between appetite for FDIC deals versus open bank transactions?

Yes.

Well, clearly the environment to date has largely been an FDIC assisted environment.

You have not seen many, what I would consider regular way transactions in the marketplace.

Our thought process around it is really bounded by two driving factors.

One, is is the opportunity a good fit for what we think we need to achieve over the long-term to produce the returns we talked about and, two, our ability to understand the credit aspects of any potential opportunity and how that might fit in and how we might manage through that.

I'm comfortable with our capability, as it stands today, to look at or enter into a transaction.

But I think a lot more important is that we focus on doing the right kind of transaction and we do it in the right way, so my guess is we'll be opportunistic.

We'll look at opportunities if they present themselves.

But in the short run, we're comfortable to focus on the blocking and tackling aspects of the business and build for when those opportunities look better.

And If I could follow up on credit -- if I try to cross the segments with the product disclosure, and I apologize if I missed this, but just the regional bank, NPA's up versus allowance flat, is the bridge between that all of your comments on the C&I portfolio and where you saw the C&I deterioration but felt like some wasn't indicative of your watch list or was there something else that was happening there?

Yes, Bryan, sort of the interplay of the portfolios, but I think it is a lot of what I already talked about.

It also has a lot to do with the fact that a number of the credits that are nonperforming do tend to continue to be current on principle and interest and the loss level in those assets doesn't seem to be as high.

We also -- reserves are made up of two things, right, the reserves attributed to specifically impaired, individually assessed assets, and the pool performing assets, the fast five reserves.

And we've had improving risk profile in the commercial assets and therefore less required FAS 5 reserves, so that's driven down because of the improvement in the past grades.

If all of that makes sense.

Our next question comes from Ken Usdin of Bank of America.

Your line is open.

Thanks.

Good morning.

Two questions.

First of all, as far as the balance sheet is concerned obviously the book is shrinking from both the non-core portfolios and the core.

Can you give us an update as far as what you expect the net runoff, whatever context you want to put it in as far as the expected either size of the balance sheet a year out or the expected runoff you're still anticipating as far as sizing the balance sheet?

Yes.

It's BJ.

I think you would have noticed that our aggregate size of our balance sheet was only down about a percent, so we're hovering around this $26 billion number.

And that's more or less probably a good number.

We feel like that that is kind of where we're settling out.

We're still running off the national portfolios, and that will probably, over the near term, continue to offset anything that we would see in the regional bank.

We would hope to see some growth in the regional bank but that hasn't yet materialized, so you could see it float down slightly, but this should be more or less where our asset size should be.

And BJ --

And then depending on loan demand, hopefully a year from now it would be slightly better.

Now, it's a fair point on the balance sheet size overall, but if I look at the period-end earning assets, it's still several hundred million less, so is it the same context for earning assets as well that you expect to see pretty close to the bottom in terms of earning assets?

Yes, that's a good point.

I think earning assets will continue to float down a little bit more than total assets would, but I wouldn't see it floating down more than $0.5 billion to $0.75 billion.

Okay.

Great.

My second --

Pretty close to the bottom.

Okay.

Got you.

Thank you.

My second question just relates to pre-tax pre-provision income.

Excluding the debt gain this quarter, it looks to be somewhere in the low $70 million type of range.

And to your comments about while just hitting on earning assets and not seeing much margin improvement until rates go up plus Capital Markets mortgage, I am just wondering are we close to also a bottom there as far as pre-tax, pre-provision and what headwinds do you still see, if any, as we move -- headwinds or tailwinds do you see from here as far as looking out?

Yes.

Good question.

It's BJ again.

A lot of the volatility in our pre-tax pre-provision over the last really two quarters has been related to getting some non-core businesses behind us and taking associated charges.

So my anticipation is that this is kind of the lower end of the range in terms of where we would settle out on pre-tax pre-provision and that we would steadily continue to improve here, that the bank would continue to incrementally grow and heal as the economy heals.

Subsequently, as we've talked about previously, that fixed income, those still strong would continue to moderate over time and hopefully those two would kind of cross and offset each other.

And the corporate segment, as well as non-strategic, we would hope to manage to pretty close around break even, or slightly positive in terms of pretax pre-provision every quarter.

Our next question comes from Bob Patten of Morgan Keegan.

Your line is open.

Hey, guys.

Most of my questions have been asked.

I guess thinking about TARP, we have seen some small banks pay off portions of their TARP without issuing capital, 25% initially.

What is your thought process about a piece of it versus all of it to get it going in the right direction?

Yes.

Hey, Bob, this is Bryan.

Hope you're doing well.

TARP is something that we talked a little bit even on last quarter's call.

This is something that I signaled we wanted to work with our regulators on.

We will continue to do that, to work with them.

And the right and appropriate way to repay TARP, and as I said a quarter ago and still feel this way, I would like to see us make significant progress in that regard in 2010.

We haven't, in that dialog or the way we're approaching the dialog, we've not put anything on or off the table that we would or wouldn't consider.

So as we work through that conversation with the regulators, we intend to keep our options open from our perspectives and we'll see where the conversation takes us.

Okay.

And then I guess Ken had asked about balance sheet sizing and so forth.

NIM was a little flatter than I thought through and as you look at the drivers, deposit growth, liquidity, everything very strong, your spreads are better on renewals.

Is it strictly the asset size that you guys are getting challenged on the NIM?

Yes.

Yes.

Hey Bob, it's BJ.

Most of the NIM is volume-related in terms of the weighing of it.

We are doing great as you can see on loan spreads.

If you look at our weighted average rate paid on deposits, it's been pretty flattish over the last couple quarters.

And we did a good job coming down and being disciplined on that, but there's almost a natural floor as you know to where you can go in an extended low rate environment.

So as I said previously, we expect our margin to be flat throughout the rest of the year barring interest rate increases from the Fed.

Okay.

And then one last question.

Greg had mentioned about ORE kind of peaking in the second -- ORE cost peaking in the second and third quarter.

Does that include credit costs also and is that peaking in 2010 or is it using the fourth quarter number in terms of reference point?

Hey, Bob, this is Greg.

I might not have been clear.

When I was speaking about peaking in second or third quarter I was talking about overall balances or levels of ORE, not the cost component.

Okay.

All right.

Thanks.

Our next question comes from Tony Davis of Stifel Nicolaus.

Your line is open.

Good morning, everyone.

I was wondering if you could put some numbers, BJ, or maybe Greg, here, on the credit line draw rate today versus normal or maybe also some color on the commitment pipeline you were talking about.

Any reference signs there you can give us?

I will start and let BJ finish.

And relative utilization rates is -- can very so much across banks because of the makeup of their loan portfolio.

Our portfolio tends to have a lot of small loans so utilization tends to be a little higher, so I will talk in terms of relative utilization.

It's up marginally I would say.

In terms of the pipeline of demand, as BJ said in his comments, the demand really that we're seeing is in the corporate and ABL areas and sort of lower commercial demand is still weak.

But there is a lot of activity in corporate right now with more middle-market companies being more active and borrowing.

Yes.

Yes.

I don't have much to add, Tony, other than the pipeline increases that we're seeing in those two areas are strong and a lot of those are actually from our existing lenders which means maybe there's flickers of increased loan demand in some of those sectors.

Yes.

We're also actually seeing, as we've talked about previously, we've hired some experienced lenders in our markets.

And although loan demand remains soft, we've actually seen some really good pickup in customer relationships.

Both loans and deposits from those lenders coming over already, so we're very encouraged by that.

BJ, how many, let's say in the last six months, how many new lending officers have you hired?

Do you have a goal for the total calls this year and in effect when would be perhaps earliest that we would expect to see some upturn in the core bank's loan book?

Yes.

I'd probably would say this is an estimate, Tony.

Over the last six months we've probably hired anywhere between 10 and 15 lenders or so across the footprint.

Including a few leaders that we feel very confident in to fill in some spaces.

Whereas we would have hoped that the activity that we're seeing, which is up substantially in terms of calls to customers and prospects, would have translated faster into loan growth.

We're just not seeing that yet, so whereas we would have hoped it was in the first half of the year, now we're being a little bit more realistic in hoping that we can see some modest growth in the regional bank towards the second half of the year.

Tony, this is Bryan.

Our lenders, our credit teams are looking for good opportunities and working real hard to book every deal we get an opportunity on.

But all deals are not deals that we feel like we ought to make.

And as BJ said, the environment is still soft, low levels of demand.

We're trying to make sure that at this point that we build relationships, we contact customers and book opportunities when we have those opportunities.

But we're also mindful the economy is still improving, but it's improving at a fairly slow rate and we don't want to be overly aggressive just to drive a loan growth number.

So, we'll pick our spot and we'll be opportunistic as we go through the year.

Tony, this is Greg.

One final point I'll add.

We certainly would like to see more loan growth than we've seen.

I think it's important to point out in first quarter, our balances in the C&I and the regional bank were impacted by normal increases and decreases.

In this case, a decrease in our mortgage warehouse lending because of the level of refinance activity decreasing.

That accounted for a couple hundred million dollars in decreased C&I balances for the quarter.

Our next question comes from Jefferson Harralson of KBW.

Your line is open.

Alright.

Thanks.

My question's along kind of the same lines.

You guys are saying it's kind of possible that we're near the end of loan shrinkage, which it all makes sense, but then you sit there and see the large runoff book being being five or six or more billion dollars.

Does it -- can you help bridge me to thinking that loan growth can be kind of flat for the year and maybe down $1 billion dollars when the runoff portfolio is that large?

Do we expect that kind of offset in the regional bank?

Or am I missing something on the timing of one or the other?

Thanks, Jefferson, it's BJ.

I don't think you're missing much.

I think the national will still continue to wind down.

But as Greg said, we're bottoming out on utilization, and utilization of existing commitments out there would certainly help us in terms of loan balances going forward.

Some of the market share that we think we're generating, or will generate from the pipelines that are growing from these lenders that we have hired, coupled with some of the bright spots in Corporate and ABL we think could largely offset some of that.

So we don't have a lot of expectations of large growth.

We're probably looking at flat to slightly down.

But not precipitously down is what we're looking at.

Jefferson, this is Bryan.

I climbed out on a limb in the last quarter call and said I thought we were bottoming in the bank we saw some encouraging signs, were down a little bit, and BJ, or excuse me, Greg point out one of the key reasons.

If you think about the two segments of the portfolio that you pointed out, we do feel pretty good about where the bank portfolio is and the opportunity to see that grow over the course of the year.

The non-strategic or these wind down portfolios, a lot of the rapid decline that you have seen in them over the last couple years is essentially the decline in the construction portfolios which totaled about $4 billion in outstandings in January of 2008.

They're down to $350 million or so today; about 250 in home builder and about 100 in one-time closed.

So there's not a lot of room for those to continue to decline.

We will work through them, and they will go away largely over the course of this year.

The home equity portfolio has been running off.

It was probably $200 million or so this quarter, it's amortizing at about a 15%, 16% CPR over the last couple quarters, so it will be a little bit more stable.

Over time that will wind down.

It is not being replenished.

It will wind down towards zero, but over that time we will see growth and deployment of capital in the banking business, so it should somewhat offset.

All right.

Thank you.

And my follow-up is on time to break even.

Is there anything in the environment or this quarter or maybe a little more loan shrinkage or possibly the higher warranty costs that makes you think about a change?

And when you think about when First Horizon can break even again and do you think that 2010 you can have a break even or better quarter in 2010?

Jefferson, excuse me, this is Bryan again.

There is nothing negative in this quarter that changes my thinking on it.

We don't forecast, and I don't mean this to be a forecast, but I am encouraged with the trends that I see in our business.

I'm encouraged with the trends that I see in credit.

I'm encouraged with our customer trends, and we don't know what we don't know about how the economy plays out and how credit might impact things.

So that being the wild card that's not new or different, I feel good about our prospects for returning to profitability later this year.

Okay.

Thanks a lot.

Our next question comes from Erika Penala of UBS.

Your line is open.

Good morning.

Good morning.

Good morning.

I wanted to ask about how the loan modification activity could potentially impact your second lien portfolio.

But first could you remind us how much of your seconds you're also holding the firsts on?

Yes, Erika, this is Greg.

My recollection is --

It's very little.

This is Bryan.

We hold very little of the firsts.

We don't have much of a first mortgage portfolio.

There was a significant portion, I think about 87%, we originated the firsts.

Right.

That's what I was thinking about, Erika, is the amount that we originated when we had the mortgage company that were behind us is more than half, and I think in the range that Bryan talked about.

So absent of principle crammed down do you have any insight whether the first has been modified?

I would say we have -- it is a little translucent.

Getting that information is a challenge.

We spend a lot of time gathering intelligence, particularly with the talk of impacts to second in Washington right now.

So we have sized what we think our risk is with respect to being over 100% or 115% loan to value on the seconds a bit, and working to better understand what we're behind.

We do know from work we did several years ago, that the proportion of firsts that are interest only that were behind, is something less than 10% of what we originally originated and would imagine that it's at this point a lower percentage than that because those loans have likely had issues to date.

In the event of a modification that involves the principle cram down, what is your right as the second?

Do you immediately have to release?

Do you have to charge off immediately?

I think that remains to be seen, and we have a legal contract of a debt obligation and we have a legal second lien, so I think there is uncertainty around any changes there.

Right now we have a legal lien and a loan.

Our next question comes from Joe Stieven of Stieven Capital.

Your line is open.

Good morning, guys.

Good morning, Joe.

Actually, Bryan, everything I was going to ask on acquisitions but that was already asked, so congratulations for another good quarter.

Thank you.

Thank you.

Our next question comes from Kevin Reynolds of Wunderlich Securities.

Your line is open.

Good morning, everyone.

Good morning, Kevin.

A quick question, and I guess most of mine have been answered as well by now.

I think this probably goes to BJ.

I may have missed this in the prepared remarks.

The increase in salaries sequentially, how much of that would you consider to be seasonal in nature and how much of it would you expect to be run rate as we roll forward?

I think in terms of total personnel, I'd say virtually all of it was increase in incentive-related compensation and/or payroll expense, i.e., things like FICA tax.

If you look at our FTEs, they continue to come down, so it's not a question of increased salary expense.

We're down 500 FTEs or so from last year, almost 700 actually.

Okay.

And then from an incentive comp perspective we're talking the fixed income Capital Markets almost entirely?

Yes.

That's the vast majority of it.

Okay.

Thank you.

Good quarter.

Thanks, Kevin.

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

Your line is open.

Good morning, everyone.

Good morning, Kevin.

Bryan, I know you addressed the M&A question.

Just one quick follow-up on that.

Given what you're seeing transpire over the last quarter, the markets you're interested in expanding, are you seeing an increased number of potential targets in terms of an FDIC assisted nature?

And I am talking over the next several quarters or do you think it's more likely that it's just going to be more of a -- the more likely opportunities for you guys are going to be coming out of the credit cycle and partnering up with some banks that end up surviving, but due to fatigue or some other issues see the light that it is better to partner up with stronger institutions?

Thanks.

Thank you, Kevin.

In an absolute sense you've seen what would appear to be more troubled signals of troubled institutions in the marketplace it's in and around Tennessee.

I am not sure that changes our thinking about the opportunities an awful lot.

I think the other big dynamic that's changed, and it's sort of a positive and negative as I think about it, the FDIC bidding process has clearly gotten more competitive.

It looks like the loss sharing levels are going to be increased or reduced depending on which side of the table you're looking at it from.

I think that's good as from an FDIC fund perspective, and as somebody that pays the part of the cost of that, we think that's a positive.

We think it makes the deals marginally less attractive.

So back to my comments earlier, we're most focused on making sure that whether it's FDIC, in the future or regular way deal we're doing something that makes sense from the franchise that we're trying to build where we can build the density we'd like to operate with, where we can build the focus in markets that look like Tennessee markets.

And so I don't think much has changed in the last several months that make it more or less attractive, other than the items that I just mentioned.

Okay.

Thanks.

Sure thing.

Sir, I am not showing any additional questions.

Okay.

Thank you, Amy.

Thank you for joining our call today.

Please let Greg or BJ, me or Aarti know if you happen to have any additional questions or need additional information.

Thank you again to the First Horizon and First Tennessee team for all you're doing.

I hope everyone has a great day and a nice weekend.

Thank you.

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

Thank you for your participation and have a wonderful day.

You may all disconnect.