First Horizon Corp (FHN) 2010 Q4 法說會逐字稿

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

(Operator Instructions).

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

I would now like to turn the conference over to your host, Ms.

Aarti Bowman of Investor Relations.

Please go ahead.

Thank you, operator.

Please note that our press release and financial supplement, as well as the slide presentation that will be used 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 (technical difficulty) 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 is noted in the slide presentation and may be noted in this conference call.

A reconciliation of that non-GAAP information to comparable GAAP information is provided in the footnote or appendix to 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 Jardine.

With that, I will turn it over to Bryan.

Thank you.

Good morning and thank you for joining our call.

Fourth-quarter and full-year 2010 demonstrated our continued strategic progress.

We have made significant headway on our key priorities and goals for the year.

We returned to profitability, significantly improved credit quality, structured our balance sheet for growth, repositioned our core businesses, and repaid TARP while maintaining our strong capital position.

During 2010 pretax income increased from 2009, driven by solid performance of our core businesses.

We are pleased with our 2010 accomplishments and feel good about our 2011 prospects.

In 2011 our focus will be on growing our businesses, improving productivity and efficiency, and continuing to proactively deal with credit.

We are encouraged by recent signs of an improving economy, but we expect a slow economic recovery and low interest rates are likely to persist.

In this kind of environment, controlling cost is important.

We spent the last year making investments to become more efficient.

We have upgraded systems and streamlined and improved processes.

We will continue with these efforts in 2011 as BJ will discuss in a few minutes.

But the bottom line is we are starting 2011 as a more productive and efficient company and expect to make additional progress this year.

We have also been taking steps to ensure that our core businesses of regional banking and capital markets are positioned to take advantage of opportunities in an improving economy.

Again, I'm pleased with the progress we are making and believe we are beginning the year with competitive advantages.

Customer service will remain a primary focus in 2011 as we work to deepen and expand our customer relationships.

Our efforts are already paying off with average core deposits up 9% in 2010, and net checking accounts growing 2%.

New consumer loan production was up 5% from last year.

Although our nonstrategic loans continue to run off, the regional bank loan portfolio is benefiting from our sales force and active calling program.

During 2010 we hired 20 bankers and paid 34,000 outbound calls to commercial customers.

Our loan pipeline is stabilized.

We have started to see C&I growth driven by our corporate customers, particularly in asset base lending where loans were up 11% from last year.

We are also seeing opportunities in commercial real estate as we have capacity in this asset class.

Pricing terms are favorable in the CRE sector as we booked loans with experienced borrowers with good track records.

We will continue to actively pursue new business in 2011, while maintaining credit and pricing discipline.

Turning to our capital markets business, we expect continued strong returns in 2011.

Over the past year, we have added new accounts and made a number of strategic hires that should help further expand our extensive distribution platform.

However, fixed income revenues are likely to continue to reflect the normalizing of market conditions.

To sum up, we believe we are on our front foot for 2011.

We recognize that the operating and regulatory environments present challenges.

Out of these challenges will come opportunities, and we are set to take advantage of the opportunities.

With our industry-leading capital ratios, we have the flexibility to deploy capital, take advantage of both internal and external opportunities.

To that point, we recently declared our return to a quarterly cash dividend of $0.01 per share.

We still have work to do, but we are confident in our ability to successfully execute our strategic plan and to achieve our long-term goal of maximizing shareholder returns.

I will be back for some closing comments, but BJ will now take you through the detailed financial review.

BJ?

Thanks, Bryan.

I will start on slide five with some highlights and significant items for the quarter.

As Bryan mentioned, our net loss billable to common was $0.20 with the $63 million impact of TARP-related charges.

Net income from continuing operations at $17 million with core business' solid pretax income of $89 million.

Loan loss provision decreased for the second consecutive quarter with charge-offs down for the sixth.

NPAs, as Greg will talk to you about in a minute, down 9% linked-quarter.

Mortgage repurchase provision expense decreased to $44 million in the quarter as our expected rescission and severity rates remained fairly steady, and no private securitization requests and no new securitization litigation occurred in the quarter.

And our capital ratios, as Bryan mentioned, remained strong after TARP repayment and our successful common equity offering.

A few significant items in the quarter in addition to TARP repayment you will see in our numbers.

In our nonstrategic segment, we had a decrease in our net hedging results declining to positive $7 million from last quarter's $32 million.

We did execute a sale of a portion of our Class B Visa shares of about $15 million, reduction of our Visa contingent liability or part of it of $8 million and some various restructuring and repositioning expenses for a net change quarter to quarter of $4 million.

Turning to slide six, the consolidated financial results for the fourth quarter.

In addition to provision at $45 million being down for the seventh consecutive quarter, we saw a modest decline in NII.

Non-interest income at $211 million of capital markets fixed income revenue while solid was lower than 3Q, and as discussed, mortgage hedge results were lower as well.

Expenses were down to $335 million as both core business and nonstrategic segment expenses declined in the quarter.

In conjunction with our TARP retirement, we raised a net $263 million in common equity, issued $500 million in senior debt at the holding company, and announced the redemption of $100 million of our trust preferreds.

Due to the capital raised in the fourth quarter, you'll note that we added 26.3 million shares.

Turning to slide seven, pretax income for our core businesses of Regional Bank, Capital Markets and Corporate was $88.6 million in the fourth quarter with consolidated pretax income of $13 million.

Regional Bank's pretax income improved to $60 million, a 24% increase from last quarter, driven primarily by lower provision expense.

Linked-quarter provision in the bank decreased by $8 million to $2 million in the fourth quarter.

Revenue in the bank was up 1% from last quarter.

NII improved 2% from higher loan fees and the recognition of interest income on previously nonperforming assets, and fees were relatively stable.

In our Capital Markets segment, pretax income declined the $23.5 million in the fourth quarter as fixed income revenues decreased from lower volumes.

Fixed income average daily revenue was at $1.4 million, down from third quarter's $1.7 million.

Expenses declined 3% from lower variable comp, which was somewhat offset by higher legal and professional fees.

Fourth quarter's ADR was indicative of ongoing normalizing market conditions, which we currently expect to continue into 2011.

Pretax income in our Corporate segment was $4.6 million in the fourth quarter, up from last quarter's loss of $14.4 million.

The improvement was mostly driven by the securities gain of $14.8 million from the sale of a portion of our Visa shares and an unrelated $8 million contra expense related to the reversal of a Visa contingent liability.

Those gains were diminished by the $5.4 million of restructuring, repositioning and efficiency charges.

In our nonstrategic segment, linked-quarter mortgage net hedge results declined 78% to $7 million as we experienced rate volatility and a rapid increase in spreads.

For the full year, consolidated expenses decreased 13% from 2009 to 2010 from lower environmental costs as foreclosure experience and mortgage repurchase provision declined as reflected in the nonstrategic segment's 19% decline in expenses.

We expect that our 2011 expenses should be lower than 2010.

Over the next year, we plan to improve our efficiency by working to become more productive and improve our cost structure.

As we have discussed in the past, we are focused on taking costs out of the organization by looking both vertically, meaning within lines of business and support groups, and horizontally across the organization at things like cost per branch, cost per loan and cost to service to streamline processes and reduce expenses smartly.

Turning to slide eight, our mortgage repurchase reserve was $183 million at the end of the fourth quarter, and our mortgage repurchase and foreclosure provision expense was $44 million.

The pipeline increased 14% from last quarter to $534 million.

Although the inflow of requests increased $54 million to $263 million, resolutions were up as well 34% to $196 million.

Net realized losses were flat at $36 million.

Although our rescission rate was higher in the month of December, it remained within the range of 40% to 50%, and severity was stable at 50% to 60%.

The majority of requests are still in the 2007 vintage, but we're starting to see the mix shift towards the 2008 originations as the amount of new requests between the 2007 and the 2008 vintages were about equal in the fourth quarter.

As a reminder, we sold our mortgage platform in August of 2008.

In fourth quarter, the majority of our pipeline of requests was GSE-related.

In light of some of the GSE-related mortgage repurchase settlements we have seen in the industry, we are examining potential courses of action for our Company.

We still have not seen any request from our private securitizations, and we are not aware of being named in any lawsuits regarding the privates other than those we reported last quarter.

We continue to believe that the risk from the privates should be manageable.

Turning to slide nine, consolidated net interest margin was at 3.18%, a decline of 5 basis points from the third quarter.

The NIM compression was driven primarily by the excess Fed balances, which had a 17 basis point negative impact on our margin in the fourth quarter compared to a 13 basis points drag in the third.

Also, lower yields from the securities and trading portfolios and mortgage loans in the non-strategic portfolio contributed to the quarter's lower NIM.

Core business NIM was solid at 3.56%.

We continue to see better loan pricing as yields were up 1 basis point from last quarter and 21 basis points year over year.

The weighted average cost of core deposits declined 4 basis points to 70 basis points linked-quarter and decreased 20 basis points year over year.

Over the next year, assuming rates remain low and loan growth stays muted, we currently expect that the net interest margin will be relatively stable, although we could see modest up or down movement over the course of the year absent any Fed rate increases.

Moving on to the balance sheet, consolidated average core deposits rose 1% linked-quarter.

Average loans on a consolidated basis fell 1% as nonstrategic loans dropped 6%.

The Regional Bank posted a 1% increase in average loans driven by increased lending activity in corporate lending, asset base lending and business banking despite fourth quarter's reduction in mortgage warehouse lending.

Period end our securities portfolio was up to $3 billion in the fourth quarter.

We added about $400 million as we delayed fully funding the portfolio until rates were moderately more favorable towards the end of the quarter.

Going forward we expect the size of the securities portfolio to stay relatively stable, although it may fluctuate if we take advantage of opportunities to buy securities at attractive yields and structures.

Turning to slide 10, you will see we have made significant progress with our balance sheet positioning and profitability, as Bryan mentioned, particularly in our core business segments.

Full-year pretax income of our core businesses at the bank, capital markets and corporate improved to $257 million, a 76% increase from 2009's $146 million.

Additionally our pretax loss in our nonstrategic segment dropped from $567 million in 2009 to $207 million in 2010 as a significant reduction in credit losses more than offset increases in mortgage repurchase-related expenses.

As Bryan said, we believe we are entering 2011 on our front foot, and we are well prepared to take advantage of growth opportunities.

However, environmental and regulatory pressures, both revenue and expense-related, including volatility in our mortgage repurchase pipeline and reserve, will remain with us in 2011.

While further improvement in credit-related costs is expected to benefit profitability, the rate of improvement is likely to slow.

In short, we are pleased with the progress and feel good about the ongoing successful execution of our strategic plan, and with that, I will turn it over to Greg.

Thanks, BJ.

Good morning.

I will start with slide 12.

We have seen some good progress in credit quality as our proactive approach paid off.

Year over year net charge-offs declined 45%, NPAs were down 20%, and provision expense dropped nearly 70%.

I will discuss NPAs on slide 13.

Linked-quarter we saw a decline of 9%, driven by fewer additions, more payments, as well as improved performance in the Regional Bank C&I portfolio from fewer downgrades and more upgrades.

ORE balances also declined due to more sales and fewer additions.

I will talk about the portfolio highlights on slide 14, starting with our income CRE portfolio.

Linked-quarter charge-offs increased by $6 million to $13 million from notes sales and valuation write-downs in the fourth quarter.

NPLs were relatively flat from last quarter.

In the fourth quarter, the hospitality industry showed some stress, but other sectors in our CRE portfolio remain stable.

We expect continued stress as more borrowers come up for renewal; however, headwinds seem to be somewhat moderating in our markets as we are seeing less downgrade activity.

Reserves were relatively flat at 9%.

Our C&I portfolio showed improving trends as charge-offs declined to $14 million.

NPLs were down $31 million -- down by $31 million.

The decrease was from large credits coming off of non-accrual status, as well as overall improvement for more upgrades and fewer downgrades.

Our C&I portfolio also includes our TruPS bank holding company and other bank-related loans.

Seven bank TruPS are on deferral in the fourth quarter.

Although financial institutions generally remain stressed, we have experienced some stabilization over the past few quarters.

At this stage of the credit cycle, we anticipate the C&I portfolio's credit trends should be stable to improving.

Our home equity portfolio's credit trends remained relatively stable in the fourth quarter.

Linked-quarter charge-offs decreased 7% to $42 million, and 30-day delinquency was stable at 2.3%.

Linked-quarter NPLs increased by $6 million to $32 million, which included a large consumer credit in the Regional Bank and reflected a higher number of modifications as we work with our borrowers.

Reserved were flat at $150 million.

I will wrap up on slide 15.

2010 showed significant improvement in credit quality.

As NPAs declined, charge-offs decreased, and reserves were down.

In 2011, assuming a stable to gradually improving economy, we expect a continued decline in credit costs, although we could experience quarter to quarter volatility, especially in our commercial portfolios.

And, as BJ mentioned, the rate of improvement will likely slow.

The rate of credit improvement will likely slow.

I will now turn it over to Bryan for some closing comments.

Thanks, Greg.

I'm pleased with our accomplishments in 2010.

We made progress on improving credit quality, strengthening our balance sheet and maintaining strong capital ratios while repaying TARP.

We have also taken steps to become more productive and efficient.

We believe we are positioned for growth when the economy recovers, and we will continue focusing on our goal of maximizing shareholder returns.

Before we take questions, I will thank our employees for their hard work over the past year.

Your efforts are making a difference giving us a competitive advantage that will allow us to capitalize on the opportunities ahead in 2011 and beyond.

Operator, we will now open the call for questions.

(Operator Instructions).

Ken Zerbe, Morgan Stanley.

Can you just talk a little bit more about the assumptions you are making in terms of your NIM outlook?

When you say it is going to be stable in 2011, would exactly does that assume?

What we are looking at is, as I talked about a little bit in the prepared comments, we used loan growth, continued low rate environment, so we are not assuming any increases from the Fed.

And, as we look at some of the positives that we see in our performance like loan yields improving getting better pricing in the loan books from the Regional Bank, we also have lower reinvestment rates that we are taking on the securities portfolio as we reinvest there.

So it is kind of the positives offsetting the negatives in 2011.

A little bit of upside could be if we continue to reduce the excess balances that we have at the Fed, that has been a significant drag.

But we have got to figure out ways to put it to work, and obviously that would be preferred in the loan growth area, but we will continue to look for opportunities to improve it in 2011.

Okay.

Because it looks like your securities portfolio has obviously been increasing over the last several quarters at a pretty nice clip, obviously at the same time, your loan balance is coming down a bit.

I just wanted to make sure that in your expectations, you were at least -- I assume security balances are going to keep going up -- or I mean I know you're going to try to reduce your excess liquidity, but it seems like that could be a bigger drag if you are assuming something other than that?

I don't -- I think what we have seen in the securities portfolio is relatively stable from where it is.

We ended the period at about $3 billion.

Our securities portfolio, as you know, relative to the industry is on the smaller end of the asset base.

And so we want to be pretty conservative there and not get caught upside down if rates do move the wrong way.

So where we have been adding has been shorter duration, looking for structure versus yield.

So we are hesitant to really make meaningful increases to the securities portfolio over the course of 2011.

Brian Foran, Nomura.

In the past -- I guess it has been a few quarters -- but in the past you would kind of walk through what a sustainable long-term target for dollars of pre-provision earnings is, and if you gave it this time, I'm sorry I missed it.

But just how should we think -- I think some people were disappointed this quarter, but really it is just MSR hedging and capital markets, and the MSR hedging is ultimately going to go to zero anyway, and the capital markets is countercyclical.

So what do you think the right dollars of quarterly pre-provision earnings for the core company is to think about over the next several years?

I think the way we look at it is we put out our bonefish targets.

And if you followed those through over some period of time, we will be exiting our non-strategic segment.

We cannot exactly pinpoint when that is, but that will happen over time.

And so we look really at our core business performance -- the Regional Bank, Capital Markets and Corporate -- as really kind of what we are focused on improving from a pretax, pre-provision perspective and a pretax earnings perspective.

So if you took a look at the underlying performance of those two -- I'm sorry, those three segments, they continued to heal and improve.

I believe that slide 10 shows a significant improvement over 2009.

So we expect that to continue to improve over the course of the next several years.

And then one question I always get on the non-strategic on slide 20 or page 20 of the supplement, I realize this quarter the pre-pre in that business was negative, but in most quarters it kind of nets to zero.

So, as the revenues ultimately go away, the expenses are definitely trending down, but will the expenses fully go away, or should we think about the pre-pre-contribution of that nonstrategic segment as zero every quarter, or do we have to build in some piece of expenses, which will ultimately be allocated back to the broader business?

I think over the near term, meaning 2011 at least, that expense is going to be him.

That nonstrategic expense is made up with the mortgage repurchase expense, which is probably half of that number right now.

It is people related to working out our mortgage repurchase, our nonstrategic portfolios, the technology associated with that, etc.

And so until those are fully wound down, you are still going to see that.

But you should see that continue to come down steadily over the course of 2011.

Paul Miller, FBR Capital Markets.

On the mortgage banking side, we saw a big decline, and a lot of that I think was due to hedging.

But I also know that you outsource a big chunk of your mortgage banking I think now to PHH.

How should we view that going forward, and why did the -- was it -- why is it so lumpy on the hedging side?

On the hedging side, we still had positive hedge results, but you saw, as you know, there was a lot of backup in rates in the fourth quarter, particularly in December, and that caused a lot of volatility in the markets.

And though our hedge was effective, we had a positive to it.

It was very difficult to hedge.

So we know that that is going to move around.

We had a couple of quarters, several quarters of very positive hedge results, and this quarter was just more modest but still positive.

On the PHH side, we have outsourced that origination.

We have made some changes in the model late in the year.

Fourth-quarter originations were impacted by rates backing up.

They fell a little bit.

That is going to be a fairly small piece of the business from quarter to quarter.

It is going to be a flow business, and it is going to be essentially origination fees and straight pass-through to PHH.

Okay.

And then real quick on the commercial real estate, I mean I know there is still a lot of people out there concerned about the commercial real estate exposure out there.

What are you seeing in your core markets, and then if you have some out of your non-core markets, I know you have been running that off.

What we have seen is actually over the last few months some stabilization within the income CRE.

Within our core areas, we see principally stabilization in the industrial and in the retail to a degree.

We have seen in over -- we have had opportunities in multifamily, as well as hospitality within our contiguous states in Tennessee.

What we see is obviously the states that are under duress -- Florida, Nevada, Arizona -- still under some stress, we don't -- our exposure is declining there fairly significantly.

We did have an asset sale in Nevada this quarter, this last quarter.

And it is still a little messy in some of the states, but within our core area we are seeing some stabilization, and we actually see sponsors now kind of stabilizing themselves, which is assisting as we are looking at renewals through 2011.

We did see hospitality, which we had no NPLs quite surprisingly.

We did see one large asset to go NPL, but that was not necessarily a surprise.

Steven Alexopoulos, JPMorgan.

Maybe I will start, could you just go through why are the costs of time deposits not coming down more quickly?

242 is about double where everybody else is.

Maybe talk about what you have maturing this year and what the new rates look like.

You can see by the time deposit balances that they continue to steadily come down.

We don't emphasize nor focus on time deposits on the sales side in the Regional Bank.

So you can see those continue to steadily runoff.

Anything that we are doing is being booked at lower rates.

So if you look at the interest expense that has, it is a pretty modest amount relative to our total interest expense.

But you will see that continue to come down.

Okay.

Maybe just one other question.

With the tangible common equity ratio now over 10% and growing, maybe could you give your view on how you are seeing attractiveness for M&A deals given where pricing has moved to and also maybe talk about should we expect to see a share buyback this year?

Tangible common is right at 8, 8, 9 I think, or thereabouts.

Tier 1 common is a little north of 10%.

I think a lot is going to unfold around capital.

Some of it will be as a result of the stress testing that the largest 19 are going through.

We will learn a lot more about capital repatriation whether it be dividends, dividend payout ratios, stock buybacks, so we will learn more about that in the next few quarters.

We think that there will be opportunities from an M&A perspective to put capital to work.

I would say that some of the pricing that we have seen more recently -- and although this is not a studied analysis -- is more aggressive than we would have expected at this point in the cycle.

But we do think that there will be opportunities to put capital to work at very attractive levels.

And to the extent that the flexibility from the SCAP testing and so on allows us to think differently about repatriating capital, we will evaluate that as well.

Bob Patten, Morgan Keegan.

I guess, BJ, you talked about examining potential courses of action on mortgage.

While we are not expecting you guys to give us an answer, can you give us some detail around what the options are here?

Well, I think obvious ones, Bob, are around what we saw Ally and Bank of America do with Fannie and Freddie, and so we have obviously studied that.

We're looking at that closely.

And so we are evaluating our courses of action on whether or not that is appropriate for us to do or enter into discussions with them on that.

With that said, we feel like every quarter we get through this, we have more and more understanding of the GSE repurchased trends and put back trends and so on.

We feel like we are well reserved on it.

We feel like we have got a good team that is working through those.

I talked about the new requests being roughly equal between the 2007 and 2008 vintages, and knowing that we stopped originating in 2008, that is somewhat encouraging.

So we are well prepared to just continue to slog this out if we need to and do it that way.

But if we see an opportunity present itself on the settlement side, we would certainly be open to that as well.

Okay.

And then I guess just addressing the dividend question, obviously you have gone from the stock dividend to a dividend.

Where do you see that?

Do you see the opportunity with your capital (inaudible) to do more than one increase in an annual period?

It is probably too early to know the answer to that.

As you know, there is a lot of work and a lot of talk being done with the stress test, too, and the larger institutions about their dividend payouts and payout ratios.

We will learn more from that.

Dividend has got to be supported by our earnings stream.

As we see what unfolds from the work that the Fed and the largest 19 are doing around capital repatriation, that will help us formulate strategy.

So I would say it is too early to address it.

Clearly we want to be in a position to repatriate excess capital to our shareholders, and we will do that at the earliest possible times.

Tony Davis, Stifel Nicolaus.

I just wondered, BJ, what 2010 operating expense base are you using when you guys project a decline over here this year, first?

Second, could you talk a little bit about the portfolio benchmarks that you are pursuing giving us maybe some specific examples on metrics you are looking at and trying to implement?

And then Bryan, I guess for you, does further productivity improvement took precedence over pursuit of M&A opportunities?

Tony, I will start.

I don't think they are mutually exclusive.

I think productivity improvement is a way of life.

It is something that we are focused on being a cultural aspect of our organization.

BJ can walk you through the benchmarks and the metrics in a minute.

But essentially we are looking at everything we do in the organization from a horizontal perspective.

From the time we get a customer request to the time we fill that customer request, looking for opportunities to be more effective and more efficient in the way we deliver that.

I think we can continue to do that and engrain that in our culture, achieve significant savings, and at the same time, be in a position to participate in the M&A environment as opportunities present themselves.

BJ, will you talk about those other two points?

Yes, sure.

So 2009 we would have had a $1.6 billion expense base.

2010 it was down to about $1.37 billion, and we continue to see that moderate.

That is, as we have talked about before, the environmental costs coming down, the nonstrategic expenses continuing to come down.

You would also see some moderation in the variable-related expenses on capital markets should they continue to normalize, as well as some of the efficiency efforts that we have ongoing.

To give you some more specifics, as you ask about what we are doing, we have about 250 benchmarks across the organization that we have in each and every one of our businesses that we are looking at to drive and improve performance.

And so it is a clear stake in the ground for our folks that run our businesses to say, there are peers that do it better or different this way and how can we improve that?

And so they are going through that on things like cost per branch and direct versus allocated cost per branch, cost per loan, cost per deposit, marketing spend per branch, financial center profitability, direct P&L profitability of our sales forces.

So breaking that down and de-averaging that.

Looking at our staffing models both front office or front-line and back office.

And so we have got a heck of a lot of different ways that we are looking at taking costs out of the organization.

As I talked about, we really want to do it smartly so that it comes out permanently, and we think the best way to do that is by systemically each and every quarter continuing to see that reduction come out.

And you should be able to see that in our core businesses going into 2011.

This is Bryan again, and to add to BJ's comment on doing it smartly, we want to do it in a way that it does not impact our customer service, customer satisfaction and our revenue streams.

If you think back about the progression that we have been through as an organization over the last several years, clearly a lot of focus on getting credit quality, systems and processes, and attacking asset quality problems.

We have spent a lot of time in the last year, year and a half, implementing business model changes, system changes, business model changes like line of business approach, systems changes that will make us more efficient.

And, as BJ said, we have got a lot of metrics.

We are being very driven by the metrics, and although this is not a target-driven process, we want it to be cultural.

It is an opportunity.

We think there is $100 million plus of expense opportunity reduction for us in this organization.

So we are not -- I say that in the context that somebody is going to ask me about the $100 million four quarters from now and the kind of progress.

We want it to be about doing it right, doing it smartly, protecting our customer base and our customer service, our revenue stream, but getting more effective and efficient.

So we are going to just keep grinding away at the numbers to get these efficiency targets met, ultimately hitting our bonefish targets, which are in that 60% to 65% range given the mix of capital markets and banking.

Marty Mosby, Guggenheim.

I had two questions.

Before I get into that, basically I was breaking it into the three traditional kind of business segments.

Regional banking tended to come in a little bit better, provisions improving, and you had about $3 million of core operating growth.

So the banking number is moving in the right direction.

Capital Markets is where I wanted to focus most of the attention.

With the drop we had in revenues, I mean, if we look at the fourth quarter with the community banking kind of customer base that traditionally helps us, there has been a lot of portfolio restructuring.

There is some cash flow coming in with prepayments.

There is a steeper yield curve.

So I was curious why the daily average dropped like it did this quarter with some of what would be typical favorable impacts that could have kicked in in the fourth quarter?

I think there are a couple of things going on.

One is I would say the last two weeks of December really fell off, and so that actually impacted the overall aggregate.

As you know, the snow up north and just generally the holidays really took a hit.

We were tracking a little bit higher on the ADR through the first two and a half months of the quarter.

But, also, I think everything you said is correct but if I talk to our guys on the floor, I think what is occurring, particularly in our depository institution clients, is that they are just not making decisions on putting money to work.

That they are sending Fed funds upstream to -- and we have seen that in our Fed funds purchase from downstream correspondence that there is a big buildup there.

Excess balances at the Fed, just taking what they can get and keeping the cash short-term because they are just afraid of getting caught upside down on a trade that they put on in the bond portfolio that that could go the other way for them.

And if you think about the smaller community banks, a little bit less sophistication, it is very difficult to make decisions about going long in the bond portfolio.

It is much safer for them to just make no decision and keep it very short.

Okay.

So, and, also, probably the desire for them to hold on to their capital, they are not ready to take any losses and start to return the portfolios to grab some of the increase in rates we saw then?

I think you can characterize it a lot of ways I suppose, but when rates are backing up, it looks like you have the opportunity to invest in a higher rate tomorrow.

So it makes it hard to pull the trigger, and I think that is much a driver as anything, particularly as you're coming to year-end.

Erika Penala, Bank of America/Merrill Lynch.

Bryan, as you think about your capital deployment opportunities and balance that with some of the risks that still exist with regards to the reps and warranties issue, how -- and I appreciate that we will probably get more clarity from the regulators -- but internally how much excess capital do you actually believe you have to redeploy near-term?

Well, I guess there is a little bit of art to near-term.

You know, if you think about the environment we are in today and the economy and sort of the rules that are unfolding around the regulatory environment, Basel III, you know were 6% to 7% tangible common equity ratio is sort of through the cycle.

We think it is probably north of 7% in what I would define as a near-term range.

As I said earlier, we are north of 8.5%, so we have a real strong capital base relative to that.

So it is a significant amount of capital that we think can be redeployed in the business over a period of time.

I do think that patients around it is important.

I think discipline around how we redeploy that capital is important.

And we don't feel a significant urgency around that issue right now because there is a lot to unfold in 2011, a lot of clarity to be gained about the banking business and capital and capital repatriation and consolidation.

So we have think we have got good flexibility with our capital base today to be very proactive.

And as a follow-up question, I apologize if I missed this during the prepared remarks, but is there a litigation reserve that you are accruing to for private-label losses?

No.

It is really no different than the comments that we made in the third quarter in a couple of presentations in this quarter or, excuse me, in the fourth quarter.

In terms of private securitization losses, we don't believe that we have any losses that we consider probable or estimable, and that is really the key criteria for accruing a litigation reserve.

As BJ said in his comments, we still don't have any claims pending with respect to private securitizations.

Kevin Reynolds, Wunderlich Securities.

A question on M&A out there and your outlook for it.

Could you talk, Bryan, a little bit about, if you could drill down a little bit in kind of the markets that would be priorities for you and then maybe the profile of what the ideal institution might be that you could take a look at if you had complete control over everything out there?

I don't think our priorities are any different today than they were six months ago.

We like to either fill in in the state of Tennessee in our existing markets or we would like to fill in in surrounding markets where we have the ability to create market density like we have in the major MSAs in Tennessee, the ability to create strong branch and deposit share, and be able to put in place a community banking model that allows us to bank in communities with local knowledge, with leaders that know their customers, communities we can push decision making out, and allow us to operate what we have been very successful in doing across the state of Tennessee.

I guess you could infer from your question the size of the institution.

I think the size is less important today.

It is more important to be in the right type of market, to have the right cultural fit, and finally, to make sure that it is a financial transaction that makes a heck of a lot of sense, not only in the short term but also in the long term.

Okay.

And I guess a couple of other questions.

To follow up on that, when talking about size and profile, and I noted some one noted earlier premiums that were going up and pricing levels that were going up, is there -- is it an oversimplification to say that prices are too high, or is it just something you will negotiate when you find the right strategic partner, and then you will figure that the multiple will settle where it settles?

I think it is probably too simplistic of me to make the generalization that prices are too high.

I have made the comment earlier about they were higher than I expected, and I commented that it was not a studied analysis.

It seems to me that the real drivers in valuation in what we think will be a slower growth economy where you have lower rates are going to be basically driven by the valuation of synergies you think can be realized, particularly the cost synergies, as well as what the drivers of the loan might look like.

So I think those two things will help you get into the right area about the valuation.

Clearly it is going to be different at any institution that you look at, depending on whether you have significant overlap or whether you do not, where they are in the credit cycle in terms of the mark.

So it is hard to generalize with respect to specific transaction pricing because I think it is going to be different transaction by transaction.

Emlen Harmon, Jefferies.

As I look at the Regional Bank, we have seen the provision come in quite a bit over the course of the year.

Could you talk a little bit just about -- is there anything in particular driving that the last couple of quarters and what you think of as core credit costs in that business going forward?

What we have seen in the Regional Bank is in the C&I portfolio, and specifically if we go through the different C&I portfolios in terms of the Corporate segment, which includes our asset base lending, that was really the first that we saw borrowers really stabilize and heal.

And it followed after that the Commercial segment, and we see now especially in the fourth quarter, late in the fourth quarter, some business banking clients also feeling more confident.

And so part of what we have seen through the year and certainly the momentum pick up in the last two quarters is the grades improving as companies have stabilized.

So we would kind of continue to expect to see that, and specifically when we start to see 2010 year-end numbers of clients in the second quarter, would expect that to continue kind of the good news.

So I think in looking at the Regional Bank along those lines in obviously about 90% of our income CRE sets in the Regional Bank as well.

As that portfolio, to be frank, it is behaving a little bit better than I thought it might so far, and I hope I continue to be wrong in that perspective that it will continue to improve.

We are seeing actually within that client set, as I mentioned before, stabilization of properties and, therefore, of sponsors as well.

So I think as I kind of on a long-term basis, we would go back to our bonefish, which is public in terms of how I think that portfolio stabilizes.

It is obviously increasing the credit quality quarter over quarter, and we would expect that to continue.

Any given quarter we may have a large client that may cause the number to go up or not.

But the overall improvement I think continues.

As the economy heals, as the clients kind of rightsize themselves to their balance sheets and are able to maneuver in the new economy, slower growth environment.

Got you.

Thanks.

Maybe more specifically, there is a $2 million provision in the fourth quarter.

Is there any reserve release in that, and then was it a couple of credits?

Could you maybe just give me a little color along those lines?

Yes, I think the charge-offs in the quarter were about $35 million, and the reserve decrease in the Regional Bank was $33 million.

But I think to Greg's point, bonefish targets over time we expect to annualize provision in the 30 to 70 basis point range.

So take 50 basis points, multiplied by our loans in the Regional Bank, and you get roughly $15 million a quarter that you might reasonably expect over some period of time once it normalizes.

I want to take this opportunity as we are talking about the Regional Bank to sort of backup to a question Brian Foran asked earlier in the call about pretax, pre-provision earnings in the core business, and talk about some of the impacts on that and the Regional Bank over what is likely to play out in 2011/2012.

We have said for a pretty long period of time, we think that our balance sheet, assuming $25 billion plus or minus balance sheet, that we ought to be able to produce in the area of $125 million of pretax, pre-provision.

I talked about our efforts to pick up operational efficiencies, the environmental costs that are still impacting us will continue to come down.

And so we really have not moved from being in that area in terms of targeted pretax pre-provision in the business.

In the shorter term, we are going to be impacted by the implementation of Dodd-Frank, most notably the Durbin amendment.

If you took unadjusted or un-offset, you are probably looking at the interchange rules impacting us by about $30 million on an annual basis, $30 million annually.

So a lot of that will be offset as we restructure products, as we restructure fees around those products, and so we will offset a fair amount of that.

But that kind of volatility will be introduced into our business, as well as everybody else in the sector over the next year or so.

So, as you think about the banking business as credit is improving, as the economy is healing, we will see some normalization, but you are going to see other catalysts that make it hard to forecast, which does not make it any easier for those of you on the call building models.

But it is going to be hard to forecast the timing of all of these things over the next year, year plus.

Kevin Fitzsimmons, Sandler O'Neill.

All of my questions have been answered.

Thank you.

Adam Barkstrom, Sterne, Agee.

Do you guys want some more questions, or have you had enough at this point?

Nothing is next.

We are --

Bryan, you could go all day, right?

That is right.

A couple of simple ones.

BJ, tax rate going forward, what are we thinking about?

And then maybe if we could get -- I know you gave some color here and there, but it always helpful to get more.

But talking about the C&I non-accrual reduction, maybe if you can give us some color on the types of credits that went back into performing, that would be great?

Our incremental tax rate is around 37%.

What you see since profitability is lower, you will see the permanent tax credits that we have take more prominence in the tax rate.

So the effective tax rate looks somewhat odd sometimes.

We have $9 million permanent tax credits that we have this quarter.

And so that certainly affects it, and going forward we will have about $7 million to $9 million, let's call, it in 2011 of permanent tax credits that we will recognize each quarter.

As it relates to the activity in nonperforming, we have one large asset that was $14 million that was a C&I asset that went back in to perform.

And then from that, there was a good breadth of customers that not as chunky as that one across both income CRE, as well as C&I, that healed.

In addition, we did have an asset sale, and in that asset sale, there were some of the -- about 14 loans that we sold predominantly were residential CRE-related that helped with the decrease as well.

But the healing is across both income CRE, as well as C&I.

Michael Rose, Raymond James.

Just a quick question on competitive trends and what you're seeing in C&I lending, specifically for the higher rated credit?

We had a lot of success in the quarter in booking corporate C&I lending, but it is getting more competitive, and it seems to get more competitive by the day both on structure and in pricing, particularly on the strong or higher rated borrowers.

Okay.

That is helpful.

Thanks.

That is all I have.

Chris Gamaitoni, Compass Point.

In the capital markets business, how much of that revenue comes from activities related to MSR hedging by your financial institution clients?

I'm not aware of any.

Yes, we have -- our derivatives business is principally a swaps business for loan customers, bond customers.

I'm not aware of any significant revenue streams related to MSR hedging in the capital markets business.

Okay.

Thanks.

And then on the -- how should I think about the home equity portfolio and the length of that portfolio?

It is non-core.

When do you believe that will roll off, and how do I think about kind of replacing those assets on the balance sheet in the future?

That portfolio is in the non-strategic side, a little over $3 billion to date.

In the fourth quarter, it ran off at about a 19% CPR.

It has been running 15% to 19% for the last several quarters, and we don't see a significant change in that in the short run.

As we thought about it and as we work on it, I think one way to think about it is, as that runs off, it is being replaced and will be replaced by growth opportunities in the core banking business.

If you think about what that portfolio represents, it is a higher credit quality home equity portfolio, but it does have lower spreads than a lot of home equity portfolios might have.

Because it tended to be a prime minus portfolio reflecting the credit quality.

So to the extent that runs down, it does not take a dollar of growth in the core bank at the margins we can produce in our core banking business to offset that from a net interest income perspective.

So we expect the trend to continue.

We expect to be able to offset the vast majority of it as we grow our core banking business around the corporate commercial, commercial real estate and the consumer lending we are able to do there.

Christopher Marinac, FIG Partners.

I just want to ask about the new loan growth that you're doing if it is domiciled in any particular part of either Tennessee or in your adjacent markets that you serve?

If I reflect just on the fourth quarter, it tends to be pretty broad-based.

The corporate lending we had good success in all of our markets and to some extent in the presence we have in North Carolina.

Commercial lending is also fairly broad-based, more centered in Nashville and in the Memphis MSAs.

But we are seeing pretty good distribution across the state of Tennessee and feel that that economic recovery that we are generally seeing nationwide is taking hold.

And as unemployment falls here in the state at a somewhat greater rate than it is nationally, we think that momentum will continue to build.

And we think the success we have had -- I mentioned hiring 20 bankers.

The bankers that we brought to the organization are giving us new opportunities and new relationships, are doing a fantastic job for us, and we think our opportunities to grow this economy look pretty good.

Great.

And just quickly for Greg, the drop in new OREO this quarter, down roughly half from last quarter, is that something that may bounce around quarter to quarter, or could that be kind of a permanent trend lower?

Yes, I would not necessarily think that it is a permanent trend.

We did have asset sales in terms of the inflow.

I would be very pleased if that was a permanent trend in terms of staying at the $30 million level, but I'm not certain that I would make that projection.

I would hope that in terms of the asset sales that we continue to have some good pickup in that area.

We are constantly looking at opportunities, and obviously some of those paid off in the fourth quarter.

So it was a good quarter in terms of inflow.

I would not -- I would hope that it stays low, but I would not necessarily believe that it will stay that low quarter after quarter.

I would now like to turn the call back over to Bryan Jordan for any closing remarks.

Thank you, operator.

Thank you for joining our call this morning.

We are excited about the progress we have made in 2010.

As we have gone through this transformation, we believe we are right on track.

It is a marathon; it is not a sprint.

We see very good, very strong momentum as we head into 2011 and are excited about the opportunities we see for us in our business.

Please let any of us or Aarti know if you have any questions or any additional follow-ups.

Thank you, again, for joining us, and have a great weekend.

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

You may all disconnect, and have a wonderful day.