Synovus Financial Corp (SNV) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Synovus second-quarter earnings 2009 conference call.

At this time, all participants have been placed on listen-only mode.

And we'll open the floor for your questions and comments after the presentation.

It is my pleasure to turn the floor over to your host, Pat Reynolds.

Sir, the floor is yours.

Thank you.

Welcome, everyone, to our second-quarter earning review.

We are using slides in this presentation today, which you can access at our website, www.Synovus.com.

I would also -- the order we're going to go in today, Richard Anthony, our Chairman and CEO, will give an overview.

Then Tommy Prescott, our CFO, will do the financials.

Kevin Howard, our Chief Credit Officer will then talk about the credit issues.

Before we begin, I need to remind you of our comments today may include forward-looking statements.

These statements are subject to risks and uncertainties, and actual results could differ materially.

We list those factors that might cause results to differ materially in our press release and SEC filings which are available on our website.

We do not intend to update any forward-looking statement to reflect circumstances or events that occur after the date that the statements are made.

And we disclaim any responsibility to do so.

During the call, we'll discuss non-GAAP financial measures in talking about Company's performance.

You can find the reconciliation of these measures to GAAP financial measures in the appendix.

Finally, Synovus is not responsible for and does not edit, nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties.

The only authorized live webcasts are located on our website.

And now I'll turn it over to Richard.

Pat, thank you very much.

I want to add my welcome to those of you who have joined us on the call today.

First thing I'd like to do is recognize our team.

Several of those team members are here in the room with me.

But a lot of great work was done this quarter.

And I think you'll see as we go through our presentation today that we have taken some bold and accelerated action during the quarter that's going to serve us very well in the future.

Some positive trends have emerged, and again, it will be our job to point those out to you and help you understand the foundational aspects of what's happening here in the middle of a difficult period that should serve us well in 2010 and beyond.

I'll also mention that when Tommy Prescott gets into his report later that you'll see a level of transparency from us that is new, that has a lot to do with projections and guidance, but primarily centers around our capital plan.

And I know that -- in our industry today, all companies have great responsibilities to manage capital carefully.

We're confident in our plan, and we look forward to unveiling that for you this afternoon.

Now going back to some of the positives that I'd like to mention, I'll give you some details in just a minute.

But we said in the first quarter as it concluded that we were going to be much more aggressive with our asset disposition efforts.

And you'll see in a minute that that indeed has been accomplished.

We have determined that we can build our reserves at a more rapid rate.

And we'll show you there an element of strength and conservativism in the area of our loan loss reserve.

And then finally, core operating result are improving.

And we believe that we have an opportunity to be profitable during 2010.

Now having made those statements, you do see that given the acceleration of some of these items that I just mentioned, our net loss for the quarter is $586 billion.

It does reflect a lower effective tax rate, meaning a lower tax benefit in the quarter, which has, I guess driven the loss up.

I will point out that that can be recovered and will be recovered as we are profitable and are able to utilize tax loss carry-forwards in the near term future.

But Tommy can explain this particular item to you later on in the presentation.

Now a few more specifics regarding generalities that I've just given you.

The allowance for loan losses increased by $277 million during the quarter, is now at a level of 3.33%.

And on top of that, we had an other real estate reserve for potential losses in that asset category of $100 million.

It doesn't show as a reserve, it shows as a net against other real estate.

But the impact was a total of $377 million.

$300 million of that was -- was created in this manner.

We had the full -- we had a disposition success rate of over $400 million in the quarter, which incidentally was well above the $106 million that we achieved in the first quarter.

We have looked out over the last half of the year and have estimated that we will have dispositions totaling $600 million in those two quarters combined.

We have assumed a loss on those asset sales of 50% or $300 million.

That is the $300 million that we have moved into the loan loss reserve for 200 and the other real estate net offset of 100.

So if you have questions on that we'll come back to it.

It is an important element for you to understand in our financials because it has to do with the success we're having in disposing of assets quicker and now our ability to make estimates more accurately.

We have an infrastructure in place, a system.

We have accountability and we have trends and patterns to work off of.

So that's where the $600 million sales estimate came from as we were calculating this $300 million reserve bill.

Another capacity trend in the quarter had to do with our past dues being down significantly.

They were 2.12% at the end of the previous quarter.

They are down to 1.2% at the end of this quarter.

And that is the first sequential quarter decline since the fourth quarter of 2006.

We were very anxious to begin to see stabilization in our NPA total.

And as you see from the information we have released, our nonperforming assets are down $15 million from the end of the first quarter.

So that, too, is a positive trend that we want to point out to you.

The core earnings potential of the Company which is the pretax, pre-credit cost, net income line item for the first time in several quarters turned up.

There are several factors for that, but it was up $15.6 million from the first quarter to $144.8 million during the quarter.

We were very pleased with this.

A driver, of course, is the net interest margin.

We had reported that in the first quarter our net interest margin increased each month of the quarter.

I can say now that in the second quarter, we had an 18 basis point increase in the margin from the first quarter.

So we feel like we've got positive momentum there.

We feel like that will continue in the third quarter and in the fourth quarter.

And we are pleased with the improvement that we're getting on both sides of the balance sheet, the discipline and loan pricing, the industry I think is seeing some of that, as well.

But I give our lenders credit for the job they're doing in pricing risk more into the loans that we are putting into our portfolio.

Another area of strength was in our mortgage banking unit.

Revenues increased $5.3 million to $14.6 million.

Incidentally the net income for our mortgage Company's subsidiary for the first six months of the year was $4.6 million.

That is certainly the best performance they've had in quite some time.

And we have offered our compliments to the team for the good work that they have done in that unit.

Another driver in addition to the margin and noninterest income of this pretax, pre-credit cost income would be our expense.

Our core expenses continue to trend downward.

Our headcount is now down over 11% from one year ago levels.

We're down to 6,400-plus in our headcount.

We're doing more with less.

Our project optimist results continue to work their way into the income statement.

We are confident that we will achieve the ultimate objective there which is in total $75 million in annual run rate, combination of two-thirds of that being expenses, lower expenses and one-third pretax income from our growth ideas.

Now, having absorbed this loss and having accelerated these charges that I mentioned here in the quarter, we have ended up with our tier-one capital at 9.52%.

Our tangible common equity to tangible asset ratio is over 6% at 6.05%.

Our tier-one common equity is 6.41%.

And again, as I mentioned earlier, we'll share more information concerning our capital with you later on in the presentation.

Those are the highlights.

I want to start with that.

And I want to get into the details now with Tommy going over the financial results, and in a few minutes you'll hear from Kevin Howard on credit.

Then we'll come back to Tommy on capital.

Thank you, Richard.

And I'm going to catch you up to page seven.

And give you some of the financial results' highlights.

And really moving on to page eight from a detailed income statement that really supports the story that Richard just gave a good overview of.

You can see the key drivers there being growth in net interest income over the previous quarter, and then really the thing that stands out in the quarter is the provision expense at $631 million.

And Richard described how some of that was used to the cause of adding to our loan loss reserve.

In addition to that noninterest expense that, as it's presented here, the increase there is driven by the successful asset disposition strategy.

And I also mentioned to you the odd looking income tax benefit of a relatively low number there.

That's the result of the change in the effective tax rate that's based on adding to a valuation allowance on our deferred tax asset.

Just a comment or two on that.

It's a highly technical rule.

It has a very short-term focus versus the tax rules which certainly give you great encouragement that you'll receive all your deferred tax asset over a meaningful amount of time.

It's a rule -- I think it was applied it very conservatively.

And in reality it's -- it's one that we really don't have the tax planning strategies that some of our peers have.

And, therefore, don't have the opportunity to offset the negativity of the cumulative losses that have occurred over the last few periods.

We look forward to turning that around and enjoying a period of time when there will be no tax expense recorded for a period of time as we recall this asset.

We believe there in 2010.

Going to take you to page number nine, slide nine.

And give you some of the highlights on our quarter deposits.

You can see we ended the quarter at $22.4 billion in core deposits.

And on the right you can see the year-over-year growth, 4.6%.

And the annualized reduction in the second quarter of 4.6%.

And just to give you a little bit of color on both of those, on the linked quarter numbers, we have I'll call it really seasonal run-off or really period end, quarter end run-off.

About $200 million in public funds accounts.

We saw a $125 million increase in transaction accounts during the period and also a modest decline in CDs for the period that was largely as I tell the margin story in a minute, very much taxed to that as we pushed high on the CD prices.

You can see in the linked quarter how the mix that we've been trying to target on the transaction accounts with the exception of a NOW account which is where the public funds that I just described were, which you can see the growth that's occurring in those transaction accounts, DBA and savings and then you can see the shrinkage that's happening in the CD accounts as we've pushed hard on price.

And on a year-over-year basis, much of the growth has come from a percentage standpoint.

We've had good DBA growth, most the dollars have come in the CD category, much of that's come in our shared deposit accounts, our shared CDs.

Slide 10 shows you a picture of the growth in the shared deposits, growing to $1.9 billion at the end of the quarter.

We actually slipped over the $2 billion mark in the first two weeks of July.

It's moved slightly below that level but still moving forward a little bit now.

The bulk of these deposits were really put on our balance sheet there in the third and the fourth quarter of last year when there was more industry angst out there.

The growth since there has been more modest.

This is a very unique and attractive account for Synovus.

It's fairly priced, but it's not one where you have to use the right to attract a lot of money.

It's a very attractive tool for growing our deposit base in a unique fashion.

Net interest income and net interest margin are shown on slide 11.

You can see that we've turned the trend of net interest income around with the growth this time from the first quarter at $243 million, reflecting a $13 million increase to almost $257 million this time.

And great story on the margins.

An 18 basis point improvement from the low point in the first quarter this year, 305 up to 323 this time.

18 basis point improvement there.

The-- the actual fundamental margin is the blue dotted line, and that excludes the impact of nonperforming loans.

You can see that it actually grew to 362, up 24 basis points.

On a fundamental basis.

We feel like we'll have some -- a good bit of additional upside on the margin.

We would expect to see modest growth in the third quarter, and then a little extra growth in the fourth quarter as some of the more expensive CDs that were booked during the late Fall and Winter of last year roll off.

The slide -- number 12 shows you the trends in our G&A expenses.

The story there is really one of a lot of hard work and a lot of -- lot of pushing on that.

We've been able to flatten and now somewhat lower the trends on expenses, and really if you exclude -- if you look at almost every single category that's embedded in core G&A expenses, they're all moving in the right direct.

They're moving down.

The thing that's keeping this from being down in absolute dollars over the first quarter this year is really the professional charges that are associated with the cycle, and really associated with the exits on real estate primarily.

You can see the continued downward trend as we more efficiently manage the Company from a headcount standpoint on the right side of that slide.

If you put together the -- all the moving parts of the way we describe it, the pretax, pre-credit cost income, it's depicted on slide 13, and you can see the improvement that we had from $129 million in the first quarter to $145 million in the second quarter.

Big drivers on that increase were what was really the margin.

We also had some help and fee income items to help lift that.

There's a reconcile there at the bottom of the page to try to bring some clarity to the way we think about this.

Many call this line pretax, pre-provision.

We think that you need to exclude the -- the cost of real estate or the exit cost of real estate losses on sales as a credit item, particularly as you get into the capital models.

You'd be double counting otherwise.

So we've excluded it from here, and we feel good about the turn and the direction of this number and believe that it can be sustained.

Slide 14 dissects that just on a more visual fashion.

The top line showing the trends in net interest income.

The middle line showing the trends and expenses that I mentioned a while ago.

Keep in mind that our result that I showed you on an earlier page with $145 million does contain the $16 million FDIC special assessment.

So without that, you're looking at -- at just about flat, and again, that's driven by the professional fees.

And then you can see the uptick on the bottom and the fee income category growing to $108 million.

We've got a little extra help in there.

We have Mastercard gain of about $7 million.

We did have a writeup, a venture capital writeup of a similar amount.

And those two items have helped boost that number this quarter.

Really on a fundamental basis we expect to see positive direction, although fairly modest positive direction from the first-quarter level as we moved forward.

I'm going to stop there, and I'm going to turn it over to Kevin Howard for the credit piece.

Thanks, Tommy.

I am pleased -- if you'll go to slide 16, I'm pleased to report that we've had improvement in our credit quality during the second quarter.

First of all, as you can see on the slide, we've built up our loan loss reserve by $277 million to 3.33% as Richard and Tommy have mentioned.

Of course $200 million of that was allocated specifically to address disposition of NPLs.

Our NPAs showed slight improvement to 6.24%, and our total NPA's decreased by $15 million.

Past dues trended exceptionally well as previously mentioned in the quarter, down to 1.2%.

Our below 90-day past dues were 1.06%.

All loan categories improved in past dues.

Slide 17, Richard mentioned the success in the asset disposition activity.

I will provide you a little color here.

Our dispositions were $404 million versus the -- just a little over $100 million during the first quarter.

Overall, we got $0.59 on book, $0.45 on unpaid balance.

The mix of the assets sold in the second quarter were right at about $300 million of that was residential.

The mix of the residential was about 60% homes, 40% lots, the remaining 100 was investment real estate and some C&I owner occupied, and somewhat spread out among the other parts of the portfolio there.

But 75% of that did come out of the residential portfolio.

Geographically, Atlanta was about half of that number right at $200 million.

Just on houses, we got about $0.77 on book and $0.62 on paid.

And on the lots, we got $0.50 on the book and 0.36 -- 0.36 on the unpaid balance.

Slide 18 as we've mentioned we built the reserve of $277 million this quarter.

We added $200 million for future loan dispositions.

$38 million was migration of the portfolio.

That's down from $51 million last quarter.

$34 million was where we updated our probability of default validations by using internal data during the second quarter.

This total reserve build of $277 million as you can see better positions us to continue our aggressive disposition strategy.

Slide 19, this slide demonstrates what we believe is aggressive recognition of addressing our NPLs.

As you can see, our total NPLs of $1.490 billion have been either written down or specifically reserved for about 36% of unpaid balance.

This percentage was enhanced this quarter obviously by the $200 million allowance for future loan dispositions which we already mentioned in the reserve build.

It also should be noted not on this page is $210 million of ORE balances.

Those have been written down, approximately $0.50 life to date.

You kind of do the algebra there, that puts our total NPAs right at about 41% written down from the original unpaid balance.

Slide 20 charge-offs.

The charge-off slide shows you by category our charge-offs for the second quarter.

The increase of $109 million primarily, was primarily due as mentioned to dispositions.

We had an increase from the previous quarter due to successful dispositions.

Was a $79 million difference.

And that's in the charge-off line.

There's another $60 million or so in the O(RE that Tommy mentioned that ran through the P&L.

And we also wrote down the differences -- we wrote down loans held for sale, we wrote them down, $50 million this quarter loans we'll be disposing in the next couple of quarters.

Excluding note sales, the charge-offs were $252 million or 3.7% of loans.

Note the investment real estate increase from 1% to 3% primarily due to two credits that we disposed -- one of them we disposed of was close -- this quarter was around $19 million, and we also had one other hotel loan that we took on that we wrote down around $7 million.

That's pretty much the difference between the quarters there and those two credits on investment real estate.

Next slide, slide 21, the NPL activity.

This probably answers a lot of questions on reconciliation -- our NPA activity.

You can see our gross run rate declined $175 million this quarter from the first quarter.

This is a trend we expect to continue based on a couple of key factors.

Our residential one to four construction and land portfolio in Atlanta has dropped from a high of $1.8 billion to I think 4Q '07 to just less than $800 million in performing loans now.

I mean, that's a -- we're expecting that run rate to subside some.

Also our leading indicators past due have improved dramatically as well as our internal current forecasts show that we'll see improvement in that gross NPL additions there.

The $245 million in payments or the principal breakdown we received from assets sold and the ORE valuation disposition number of $100 million there at the bottom was the writedown of ORE balance or losses for future asset disposition.

Slide 22 this is run rate by loan type.

Investment properties went down this quarter.

Even if you pull out -- we had a one off large credit from last quarter, you can pull that out and we still had decline there in investment properties.

Again, this is just a look from a portfolio type of run rate.

Next slide, number 23.

Just a view of what I mentioned before.

Obviously, a lot of our pain has come from the residential C&D and land acquisition portfolios.

We have seen those have gone down -- there's been a 36% decrease from our peak in 4Q '07 for the Company as well as the portfolio in Atlanta which at one point at $1.8 billion was 7% of our entire portfolio.

It's now slightly less than 3%.

Another reason we believe we'll -- our NPL run rate will subside.

The last slide I've got here on credit, as I've mentioned already, our past dues and Richard mentioned our lowest 2006, 1.2%.

Again, all the loan types are down, our residential went down from 4.6 to 2%.

C&I went from 1.1% to 0.8%.

And retail improved slightly from 2% to 1.8%.

Tommy, that's -- that's our credit report.

All right.

I'm going to take you to page 26 and chat with you a little bit about capital.

Slide 26 you can see a summary of the moving parts of a capital analysis.

What we've done is utilized the government timeframe and general structure.

We've used our loss assumptions and running behind all that is the economic assumptions that we'll continue to have some additional economic deterioration followed by stability as we go into 2010 and slight lift maybe in the second half of 2010.

We've utilized the government's methodology of bringing loan loss reserve down to the 1.5 level by the end of the period, and we have used our estimates and coming up with credit losses and pre-tax, pre-credit cost income.

The lower left hand this slide you'll see the balance sheet, and again, using methodology beginning both loans and capital at 12/31 of last year, you can see the -- the marks that are applied to the 27.9 -- $27.9 billion loan portfolio by category.

These -- these marks were within our credit organization's review.

And they basically used a statistical model, a bottoms up model, and a top-down model.

And from that derived an answer based on a combination of those views of our credit portfolio.

If you move over to the right-hand side of the page, you'll see the low forward and how this impacts capital Tier 1 balance -- the top of the page, $3.6 billion at the end of last year.

The arcs that are on the left-hand side of the page apply to the loan portfolio results in a $2.4 billion credit losses during this two-year period.

The -- I guess applied against that would be a piece of the loan loss reserve that was in place at that time, and then the additional charges against the income statement to build additional capacity for these credit losses would be in the amount of $2.2 billion just for a little color on both the total credit loss number and the capital impact of credit loss number, we are -- obviously we're two quarters into this, so we're 25% of the journey of this capital plan.

Right now, about $800 million or a third of the credit losses have occurred about at this point.

The income statement items that are shown here as the credit impact of credit losses, $2.2 billion, we're about a half of the way there even though we're only two quarters into this.

And that reflects the actions that Richard was talking about in the reserve builds and the willingness to get this behind as quick as possible.

We also have a buffer of the pretax, pre-credit cost income that will occur during this eight-quarter period.

What we expect is continued lift in the margin through the end this year, a little bit of additional lift as we move into next year.

A lot of that's coming from the frontline job that our lenders are doing on price and assets.

And the bulk of it is coming from a little bit more efficiently -- funding our balance sheet from a interest rate funding cost standpoint and a little bit of a change in the mix that we've been pushing and getting.

We expect expenses to continue in a downward fashion from the level during the next couple of quarters, and then, a little lighter into 2010, may even begin to lift a little bit as some of the -- the benefits and so forth that are not contained in the current run rate begin to occur.

Then we expect fee income to remain a contributor with a little bit of continued lift from the current level.

And the tax benefit here assumes that we turned around and achieved -- reclaimed most of the deferred tax asset valuation that was -- will be booked there in 2009.

We show a production in capital from the dividends including the TARP dividend that will be paid during the period here to the end of next year and all that nets to $782 million net capital burn.

You can look on down the page and see how this model brings you down to the capital ratios with an ending tier-one ratio of 9%, an ending tier-one common ratio of 6.1%, total risk-based capital at 12.2.

And then a tangible common equity ratio of 592.

Assuming a 4% Tier 1 common bogey then that indicates that you have in this model a $642 million surplus to see your way to the other side of this cycle.

We will continue to watch the economy, we'll continue to see how our loan portfolio's doing, whatever the environment may be.

We'll continue to consider the outside influence of regulators and government standards and whatever the other conditions might be.

Those things obviously will impact capital between now and the end of the year.

Right now, our conclusion is that we do have this adequate capital to get to the other side of the cycle.

In the meantime, we're also doing things you can do to manage capital more efficiently by really looking at any -- selling any type of noncore, non strategic assets, looking at -- really doing a better job of managing the risk-weighted asset level and that type of thing that is not considered in this surplus that we've shown here and will be additive to it in some amount.

So I'm going to stop there.

Richard, turn it back to you.

Tommy, thank you.

I hope this new format that we have presented has been helpful to you.

And I'd like to open the floor now, open the call now for any questions you might have.

Thank you, ladies and gentlemen.

The floor is now open for questions.

(Operator Instructions) Our first question is coming from Kevin Fitzsimmons.

Your line is live.

Good afternoon, everyone.

Richard, could you just give us an update on where -- where the involvement with the regulators is at this point.

I mean, are they -- your structure's a bit unique and with all the different charters, you're dealing with multiple regulators.

Can you say whether there's any informal or formal agreements in place with any banks themselves?

And how are they accommodating you in terms of dealing with the multiple regulators?

Are you dealing with one point regulator on this, thanks.

Yes.

Kevin, we -- we deal with multiple regulators, but, you know, -- at my level here, the -- the fed is of course the supervisor for the holding company.

And we obviously don't release any details and particulars about the regulatory relationships that we have.

But we have a good relationship.

We are working -- we're working very closely with them as needed.

And I think there's nothing really to say there other than it's, we -- I think we get good marks for being responsive and I think we have taken over the last several years some good advice they have given us.

It really goes back about four years dealing with what you're talking about, the complexity of a multicharter organization.

We have taken their suggestions and incorporated them into I think a much stronger system than we had before ranging from enterprise risk management to credit oversight.

So I'd say the relationship is good, and we view their suggestions as we would be expected to with a high sense of urgency to implement.

Okay.

And just a quick follow-up.

Can you give us an update on where Sea Island stands?

And I know last we heard that was trying to get restructured and what the update is on that, thanks.

I'll say the -- the restructured loan has been closed.

And we're moving ahead.

Okay.

Thank you.

Yes.

Your next question comes from Nancy Bush.

Your line is live.

Good afternoon, guys.

Hey, Nancy.

And congratulations on your improvement during the quarter.

Thank you.

Couple of questions here.

The tier-one common, I know you said that 4% is sort of the regulatory guideline at this point.

But as you well know, there's a "Informal" regulatory guideline that's actually 7%.

So I'm wondering if you anticipate any kind of capital raise, during the next six quarters or so>

Well, I'm -- I'll make a couple of statements and let Tommy really tackle more of that.

We certainly feel that we have adequately capital.

The 7%, I know some might speculate that that is -- is maybe a benchmark.

I'm not sure we have seen or heard that.

But capital is carefully preserved.

We've got some alternatives that aren't even incorporated into the forecast that you saw, that Tommy made reference to.

But we'll review it carefully along the way now.

Those are my comments.

I want Tommy to add to that.

Nancy, I mentioned one of the factors we're going to continue to monitor is -- are the government's input into -- really requirements on what a capital ratio ought to be in the industry or -- or Synovus in particular.

It's unknown exactly where they're heading for with the 7%.

Were that to become the standard, it's obviously a game changer for median in the industry the way they think about capital.

And we're just going to have to with the rest of them see where it all settles in.

Okay.

Secondly, the improvement in asset sales, asset dispositions during the quarter, is there any one factor or two factors that you can impute there?

Was it more aggressive pricing, was it structure?

I mean, what -- what allowed you to get so aggressive with asset dispositions, and, I'm assuming that continues in the future?

Well, I'm assuming it, too, and I'm confident that it will.

And I am proud of what went on there, and since -- since we asked [Dee Copeland] to take over, the overall responsibility, we've gotten some good results.

I'm going ask him to comment.

Yes, Nancy.

There are -- I would say there's several strategies that are going on that have been coming forward and probably first and foremost is the engagement at the local level with our local bankers.

We as always have followed and found out to be true during the quarter is that the closer we can sell the asset to where it resides, the higher the price we will get for it.

In addition to that, we also continued to work with our customers earlier to engage in some short sales as we have done.

We continued to do auctions as we have done it in the past.

And also we did some bulk sales where we feel like we will continue to need to do that to reach the velocity that we're trying to hit.

The other thing is I think the second part of the question was about more aggressive on the pricing.

I think probably it's very important to note on the $106 million that we did in the first quarter, we received roughly 60% on book, and if you'll look at the $404 million in the slides that we provided, we received almost exactly the same thing.

So we were able to move up the velocity, and because of the job that our bankers did and the local market, we were able to achieve very similar results.

Okay.

Great.

And Tommy, finally, on the margin I think you said that there would be some deposit issues that would allow or deposit pricing issues that would allow the margin to continue to improve through the fourth quarter.

You guys have always been asset sensitive.

Do you see that improvement continuing into 2010 even in a low rate environment?

Well, what we're -- and what he do believe we'll be able to agree the margin off of those deposits.

It really came on during a power rate environment at a time when the industry in general was pricing just a little bit hotter even in that rate environment.

The additional lift that we get can come from the pricing that we're doing on the loan side.

Okay.

And thank you very much.

And thanks for the slides, as well.

Okay.

Thank you, Nancy.

Our next question is coming from Paul Miller.

Your line is live.

Thank you very much.

You made a statement that you think that you guys can make money in 2010.

Is that dependent on the economy?

Do you think you can -- I think one of the issues that everybody said and the cliche to this crisis is it all depends on the economy, really it all depends on the job market.

And I know a lot of people feel the job market won't peak until the end this year, maybe the first quarter of next year.

And traditionally -- correct me if I'm wrong, but traditionally we don't see chargeoffs peaking until after that fact.

So do you think there's somewhat of a disconnect because this recession has been so intense that you've got ahead of it, or do you think your chargeoffs can peak before the unemployment rate peaks?

Let me make one statement that plays into this, and Tommy covered some assumptions so I'm going to ask him to follow on.

But I think one driver of this expectation that we have is going to be commercial real estate, income-producing commercial real estate.

And you see what we have assumed there in losses.

But we continue to really dig into that portfolio.

And I've said this many times, but I feel that it has been underwritten in a sound manner with good equity required up front with good cash flow to debt service coverage.

And those properties that do have streams of income whether it be retail shopping centers or multi-family or hotel/motel, whatever have got a lot more options in periods of stress for a lender to work with.

We've also got recourse in virtually every case, to the owners, to the borrowers.

So I'm saying that because that is a -- that is a key assumption in here that we will manage that as we have projected.

I think we will.

I'm confident.

But that could have an impact, Tommy, on our projections.

Now as far as the unemployment rate and some of these economic assumptions, I think what Tommy gave in his guidance was not overly optimistic, now why don't you comment further?

I'd be glad to, Richard.

Several key factors, and one is one Richard just mentioned and that is the -- the core trends are moving in a positive direction beyond the credit cost.

Obviously the -- and of course the margin is a big driver there.

Our management of expense is a big driver.

The credit's the main event, though, obviously.

And one factor that gives us some confidence in next year is residential real estate is a finite category.

We've had obviously where the hot spots are in Atlanta and so forth, we will run out of product at some point.

And there won't be additional residential real estate problems.

And that -- being able to define a finite nature that category gives you some confidence.

We also believe that as Richard indicated that our commercial investment property will not follow the same path as real estate for very good reason.

And then we also have been as aggressive as we can possibly be and get in the middle of these problems, jumping on the sales, building the reserves, and doing what we can to get it behind us.

In fact, the success of the second quarter and the infrastructure we built and the asset dispositions and so forth have given us the ability and really the need to recognize the activities that we think will occur in the rest of this year.

So we -- we feel like we're getting out there, and dealing with it and have a real opportunity to return to profit next year.

And one quick follow up question.

On your past dues that were down pretty significantly, was there any one or two credits that rolled off or was it just across the board?

It was -- this is Kevin.

It was pretty much across the board.

I thinking being aggressive, again, to reach out to the past dues and go ahead and deal with them and move them to nonperforming loans, and -- it was an across the board.

Okay.

Thank you very much, gentlemen.

Thank you.

Our next question comes from Adam Barkstrom.

Your line is live.

Good afternoon.

Could you go through the -- I'm not an accountant but let's talk about the deferred tax asset.

Obviously the writeoff of that's a pretty big effect to common equity.

Then if you flip over to your analysis on page 26, you have basically the bulk of that coming back on, as an effect of -- positive effect back to capital.

I just wonder can you reconcile that for me?

Yes, I can, Adam.

When you look at the capital road on the slide 26, you actually are assuming that really a pretty much statutory effective tax rate with a whole two-year period which means that -- that you booked the valuation in this period and then at some point in 2010 you begin to turn it around and have the opportunity to completely turn it around by the end of 2010.

So that's really the way it flows through the capital account with that assumption, that the profitability will allow you to reachieve your deferred tax asset.

Talk about the way DTAs work with kind of a three-year look forward.

And if you couldn't achieve profitability in three years then you were kind of required to write that off.

If you think you're going to be profitable in 2010 and we're already through the second quarter of 2009, that seems awfully, awfully a shortsighted translation of the rule.

What am I missing there?

Adam, I think you just defined the rule actually.

It does have a very short view and--.

Only three years out.

It begins with a three-year look back on cumulative profitability once you -- once you lose that on the look back including current year then you have a negative fact that really future income cannot -- just about cannot overcome.

That's the spot we're in, but as we begin to make money, we'll be able to record no income tax expense for a period of time, and then the ability to completely unwind the deferred tax valuation adjustment is not black and white.

We are making the assumption that we'll have a sufficient trend by the end of next year to reverse it.

Were that not to happen for whatever reason, then you could have some small bite out of capital, but it would not change the overall picture of this in a significant way, we believe.

Okay.

And then if I could follow up with -- see if I can put my hands on it here.

Yes, I was just curious to get some input on -- I was looking at page eight and nine of the press release.

And it's on -- the spreadsheet of loans by type.

And hearing you guys talk about the hotel loan category for the last couple of quarters.

And of course we know what one of the bigger problems is.

But I was just -- I was surprised to see that line item or that part of the portfolio up from year end, and I was just wondering if you could give us some color as to what's flowing in there?

I thought that was a business we were kind of -- loan type we were kind of shying away from.

Yes.

This is Kevin.

I think you're referring to the bond goods that we had come back on our portfolio.

And I think I've got a breakdown of that.

Let me give you a -- the hotel -- let me.

I see what you're seeing on the table.

It had an $60 million increase.

Right.

Half of that was bond puts back from letters of credit, and which gave us a -- the real growth there was only about 25 million or $30 million actually there.

And those would be -- excuse that's a year-to-date number.

That would be some of the construction that is still funding up.

We're pretty -- as a matter of fact on funding on construction, we've still got just a little bit left in the hotel segment.

I've got that somewhere, I can probably come back and give you a little color there.

$43 million still left in that portfolio.

You got $1.26 billion outstanding, only 4% of that left is still to be funded up.

Those would be older construction loans made within the last couple of years that are toward the end of that -- if I'd have given you that number about a year ago it would have been 15% or 20%.

So that would be what that growth would be.

So you're saying half of it is bond puts, and what's the other half?

It would be -- half of it would be bond puts, and half of it would be just finishing construction, what's left of construction loans still coming up as we're at the tail end of that.

And let me give you this.

I gave you year to date, the quarter growth actually with the -- this would be was actually down $15 million for the quarter from March on that balance.

I think I was giving you year to date.

So we were down $15 million for the quarter.

Okay.

Okay.

Great.

Thank you.

Thank you, Adam.

Our next question is coming from Christopher Marinac, your line is live.

Thanks.

Good afternoon.

I just wanted to clarify the $172 million in REO expenses this quarter, that's split into the $65 million and the $100 million, that's the real piece of REO then the difference there just the legal cost, et cetera?

Okay.

Of the $172 million in REO cost, is that the question?

Yes, sir.

$100 million of it was tied to the look forward that we had done, and the majority of $72 million was tied at asset disposition.

Okay.

And then if we look at slide 23 and the change that has happened in the residential the last two years, the $2 billion, isn't a lot of that $2 billion sort of picked off in the charge-off and REO expenses you've already incurred or is that change separate from charge-offs that happened over the last two years?

Yes.

This is Kevin.

That-- that would be including the charge-offs.

That would be baked in there.

Okay.

That's what I thought.

Okay.

And exclusive of the $100 million that you're taking on in this quarter for future change next quarter, do you have any sense I guess of directly -- do you expect the foreclosed costs to be similar next quarter, or is it too early to tell?

Well, we would hope to be similar, but I would say it's too early to tell.

A lot of it is you have a peak selling season now, which I think aided us a little bit.

So I think especially the third quarter we hope to start off strong, but as we would get into future -- the fourth quarter, it should lessen a little bit.

Very good.

Thanks, appreciate it.

Thanks.

Thanks, Chris.

Our next question is coming from Craig Siegenthaler.

Your line is live.

Good evening.

First, I just wanted to see if you could quantify the portion of the nonaccrual loans that you consider impaired.

I think last quarter you gave it out and it was roughly $785 million, but couldn't find a level this quarter.

Kevin and Brad are looking through the table here.

I got a second question if maybe I can work on this one?

Go ahead with your second one, we'll come back to the other.

Got it.

Just a very high level speaking on -- the peak of nonperforming assets put in the first quarter.

Do you view that as the actual peak for the cycle?

Do you think nonperforming assets could start building again in the third quarter?

We think we have peaked in the now.

We're still going to be in flow.

We've got to continue to achieve the success that we are achieving in the disposition.

So the -- even though the inflow is going to be strong, it, too, I think has peaked.

It's going to be coming in at a lesser rate but still higher than it obviously need to be.

Yes.

So on slide deck 21, that 939 in the first quarter, you kind of view that as a peak?

Yes, yes.

Got it.

Okay.

Have you all got the first question answered?

It's roughly -- we were just trying to -- in the ballpark 75% to 80% on the impaired loan question.

It was 75 to 80% on the first-quarter level or of--?

Total.

Through the total nonaccrual balance?

That's total.

Okay.

Got it.

Thank you.

Okay.

Thanks.

Our next question is coming from Jennifer Demba.

Your line is live.

Thank you, good afternoon.

Hey, Jennifer.

Could you talk about your assumptions on slide 26 and how bottoms up your analysis was in terms of your own loan portfolio versus top down and using SCAP-type loan loss ranges that were used in May for the larger companies?

Mark Holladay will answer that, Jennifer.

Yes, Jennifer we, our bottoms-up approach, what we do every month is our banks have a list of every loan over $500,000.

And what we do is put a likelihood of migration or default on those loans.

And we looked out ahead on that through 2010.

And did an assessment.

And a default rate analysis on that on the portfolio.

On the top-down forecast, basically what we did here and this was with our corporate credit group is we looked at each loan pool, we projected our nonperforming loan default rate or run rate by category, and we looked at all the industry factors, the geographic locations, all of our watch lists, other risk grades as well as an assessment of our top 140 roughly loans.

And ran through that in a multiple of ways.

And then we did a -- using our latest PD factors, we ran an assessment using those against our portfolio based on what we calculated the balances to be for '09 and '10, and all these were done separately and all three came up with a very, very close number.

So we felt fairly confident in our forecasting.

We'll continue to update those migration reports.

We continue to do that on a monthly basis, looking at the bottoms up as well as our credit group continues to do here continues to do the top down.

So we have been through that process twice now and we still stand by those forecasts going forward.

In terms of the -- the SCAP we formatted our loss rates to the SCAP model.

I think what we showed you here was more of a Synovus line item view on the portfolio, but, I think that the SCAP model does have a little higher number than what we forecasted.

Thank you.

And just have one follow up question.

I was wondering if you, Richard or Mark or Kevin, give us an update of what you're seeing by market in terms of pockets of strength or weakness?

And changes you might have seen in the last few months.

Well, we've done -- I will tell you this.

We've done a very close look at Atlanta.

We've used some of our consultants.

One group we used is smart numbers.

We've gotten some what we would call positive -- a positive view on the trend in Atlanta.

In terms of the new home inventory is down to 97 levels.

The resale year over year is moving up.

They are projecting that the resale prices to new home prices will hit 80% as of December.

And that the new home inventory at that point begins to move at a much better fashion.

So we -- we've gone in depth.

We continue to get updates and views on the Atlanta market.

And feel like there's -- there will be some increased activity in Atlanta next year.

That's one of our key components.

We continue to look at cap rates.

Vacancy rate on our income properties and of the market by market I would say if you look at office products, probably Atlanta's around 17%.

Vacancy and office, I think we've never been overly aggressive in Atlanta in office, but I think when we were looking at loans earlier, we were running at about 20% vacancies overall in Atlanta.

So we don't feel like we're overexposed to that respect.

And then I think there are -- there's one or two markets in South Carolina that have that same kind of trend on office, Kevin, you want to mention any other product retail or--?

What about markets?

She's -- Jennifer, I do think obviously we've seen deterioration in South Carolina.

We had -- we had weaknesses there that have impacted us and probably some more of that in the current quarter, although we don't think it will persist after that.

Alabama's unemployment rate has jumped up, but those banks continue to hold up as a group I would say better than any other state in our footprint.

So we've been very pleased there.

We have -- we've held our own in Nashville, but we've got some home equity underwriting there that has caused us to struggle some in our credit cost in that market, and in Memphis, I'm not sure it's a reflection of the market, but we have really dealt with more problem loans there than we should have.

We made a management change, and so I don't think that situation is reflective of the market as much as it was the -- the leadership in the past.

Florida, anybody want to comment about Florida?

I think we're still kind of holding our own there.

But--.

There's a lot of that portfolio, so we do see potentially a couple more issues coming out of Florida.

But we -- we've dealt with a big, big chunk of the issues there.

Jennifer, this is Pat.

If you look on slide 29 in the appendix, it gives you the breakout by state of the NPL run rate.

Thank you very much.

Appreciate it.

Thanks, Jennifer.

Our next question is coming from Jason Goldberg.

Your line is live.

Thank you.

Just when you made the comment you expected to be profitable in 2010 were you including a recapture of the DTA?

Yes, we were.

Then secondly, and maybe you touched on this.

But I guess I'm just having a hard time reconciling your loss rate assumptions in the capital analysis vis-a-vis what we're seen from the other banks.

You're kind of using a top quartile net charge-off rate.

Looks like CREs in line, and the median banks, (inaudible) retail or below the median bank yet your NPAs are above any bank that was in the stress test.

Could you maybe try to flesh that out for me?

Let me make one comment, Jason.

I suspect although none of us have it that if you took every one of those 19 banks' forecasts and looked at what they thought was going to happen, in no case would any of those forecasts probably match up with the government numbers.

So we have to keep that in mind.

And they had to negotiate where they ended up.

We have tried absolutely as hard as we can to be conservative, to be objective.

It serves us no purpose to -- to stretch here.

And we have certainly been aware of these comparisons that we've been shown for the other banks and for the government ranges.

But that -- that's our best shot.

It is thoughtful and conservative, and we're confident in it now.

Mark, do you want to add to that?

No.

Again, we continue to update our models on a monthly basis and reassess where we are.

But as I've said we continue to do that and still feel comfortable with our forecasts.

Should we look at this as a base case or a more averse case?

It's likely--.

Likely--.

Likely case.

A likely case.

Okay.

That's helpful.

Thank you.

Yes.

Our next question is from [Greg Tetren].

Your line is live.

Good afternoon, everyone.

Hey, Greg.

Thanks for the presentation.

It's very helpful.

Going to page 24, back to the past dues.

Just a couple of questions there.

One, it dropped probably as much as any bank that we've seen this quarter and was wondering how much of that actually were lens that were moved out into nonaccrual loans?

And if that's the case, do you expect that the ratio could pop up back in the third quarter?

And two, from a correlation perspective, if past dues dropped this much would you draw a parallel to maybe nonperforming loan end flows dropping by a similar amount which is roughly half of what we saw last quarter?

First of all, I'm going to give you my opinion on your question.

I do, clearly in any quarter, some of the improvement or some of the change is going to be impacted by what flows out of past dues into nonperforming categories.

So we would have certainly had some of that.

We do think on the second question that we will see a decrease in the in flows, but not of this magnitude percentagewise.

I mean, we're going to some -- some decrease, but if you look at the 2.1 compared to the 1.2, I don't think we'll see that much of a percentage decrease yet.

Okay.

That's helpful.

Then the other question I had, you've been very active in selling properties for a number of quarters now.

You've got a pretty good handle on what those marks are on the properties that have been sold or at least identified for sale.

Does that cause you to go back and look at the rest of the NPL inventory realizing there's a difference between FAS 114 and FAS 5 accounting.

But do you go back to the rest of the NPL inventory and mark those down so that as you go forward with future sales and future movements into ORE you pretty much already accounted for that valuation differential?

Well, we do have differential marks that are taken because every quarter we go through and we have to validate the appraisal.

In some cases we get a new appraisal.

So we take additional marks.

But there is a difference between the appraised value assuming fire sale liquidation and the appraisal which assumes an orderly disposal.

So we end up historically taking more losses once the properties go into other real estate.

Now what we're doing here is going out and anticipating some of this with the reserve bill that you've seen.

Those are my thoughts.

Somebody can probably do a better job.

Anybody want to add on that?

This is Tommy.

I'll be glad to speak up.

We used the activity that occurred in the second quarter and honestly that's the first real meaningful bite out of selling assets.

It was 4 times anything that was in the first quarter which -- so the $404 million was really new ground.

We've got new leadership, new infrastructure built to facilitate this type of movement.

And it became evident that it really is part of our FAS 5 reserve.

We had a new factor that needed to be considered.

Our view of this activity is -- the activity's influenced by a lot of things including the ability to sell, need to sell, willingness to sell, our view on that horizon was about out to the end of the year.

And we'll continue to need to update that on a go-forward basis, one of the influences there beyond that will be the -- what's on boarding on NPLs and that certainly is not clear at this point, but as clarity arrives on any of those data points we'll continue at the end of each quarter to update this factor.

Great.

Thank you.

The last question comes from Ken Usdin.

Your line is live.

Okay.

Yes, hi, good afternoon.

I just wanted to understand the machinations between the pull ahead of the provisions for future sales and just how that works going forward.

Meaning if you have an expectation of potentially getting to profitability next year, I would say that you're pretty close to saying that you're done with over providing, and even though there's probably a good amount of charge-offs to still come through the pike, how do we -- can you help us understand a bit how your reserves build or -- or relief is going to kind of work as we go through, and how we should think about, how charge-offs are going to be flowing through over the next several quarters against that?

I'm going to make one statement and I'm probably going to get in over my head here.

But we -- we will continue this methodology, and you will see us, again, look out at the end of the quarter at the -- the end of the next quarter or two quarters and we will do a projection and it will be based upon our pattern of disposal activity.

But we do expect the level of activity to begin to diminish out over the next several quarters.

So the amount that we pull into the reserve will start to go down as we end the year and enter next year.

Tommy, help me keep going over that.

Richard, you said it well.

And all the factors that impact your assumption about asset dispositions have to be reevaluated at the end of each quarter.

And how much do you need to sell, how much can you sell and all those will be re-evaluated.

The thing that will make that slow down will be the production, continued reduction and on-boarding of NPAs and really the lack of need to continues to push assets out.

I guess just to follow up, it just seems that if you're going to get to profitability obviously with help from the deferred tax benefit, but it would seem that provision expense is going to go obviously, well meaningfully below where it was in the second quarter.

But it seems like it's got to tart going below charge-offs once we get -- once we start getting into 2010.

Am I thinking about that the wrong way, or is it?

You'd actually expect that to happen in the back end of the cycle.

I'm getting more at timing as opposed to -- right, understood, of course, that that should happen back in the cycle.

I'm just wondering if we're -- if we're that close to that point already.

With regard to the comments you guys have been making over the course of this conference call?

Yes.

We're in agreement with you.

Thank you, Ken.

Thanks.

That was our final question.

Do you have concluding remarks?

I want to thank everybody for the interest in Synovus.

I just want to conclude by saying that we've got a great team here.

We're confident in the information we've shared with you, particularly that has to do with the future.

It's going to be real important for us to continue to be proactive and aggressive, in this asset disposition strategy that we have undertaken, and stay tuned.

We'll keep you advised.

Thank you, ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.

Thank you for your participation.