Synovus Financial Corp (SNV) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Synovus third quarter financial results conference call.

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

We will open the floor for your questions and comments after the presentation.

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

Sir, the floor is yours.

Thank you, Dan, and thank all of you for joining us today; and we appreciate your participation in the call.

As a reminder, you can review the slides we'll be using during the presentation on our website, www.Synovus.com.

The order today: Richard Anthony will make comments initially, our Chairman and CEO; Tommy Prescott, our CFO will cover the financials; and then Kevin Howard, our Chief Credit Officer will go over the credit metrics in the presentation.

Before we get started I need to remind you about our comments may include forward-looking statements.

These statements are subject to risk and uncertainties and actual results could vary materially.

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

Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date 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 the 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.

With that, Richard, I'll turn it over to you.

Pat, thank you very much.

I want to add my welcome to each of you this afternoon and appreciate your joining us on this call.

You have received, earlier this afternoon, our press release indicating our results; and our job this afternoon is going to be to give you as much color and detail surrounding these results as is possible.

We have prepared hard to do this and certainly we'll start with the bottom line of $423 million reported loss, which is a reflection of our continued aggressive management of this company, its loan portfolio, and its balance sheet.

We knew coming into the third quarter, and going also into the fourth quarter, that due to these aggressive tactics, we would have some pressure on the bottom line; but we will spend time helping you understand how to categorize these influences.

I want to point out in these numbers you'll find a non-cash charge of $149 million, which is the recording of an increase in our allowance for deferred tax assets.

This particular allowance now totals $331 million.

It means that we're not able currently to reflect much of a credit to offset our pre-tax losses; but we do want to point out that as soon as we're able to demonstrate profitability and potential for continued profitability, this particular asset will be recoverable and we will have a boost to our profitability as a result.

Another point to make has to do with our credit costs for the third quarter.

They total some $606 million provision, expense was $496 million.

Of that foreclosed real estate cost a little over $101 million, but these credit costs were driven substantially by valuation charges in three different categories: the new non-performing loans, existing non-performing loans and I want to come back to that in just a minute, as well as charges for estimated losses on future asset dispositions.

We, as you'll recall, began that particular accounting approach last quarter when we had announced an estimated $600 million in losses for quarters three and four, resulting in an increase in our loan loss reserve and the offset to other real estate totaling $300 million.

Well, we reset a portion of that moving forward taking $150 million in anticipated losses on $300 million that we expect to dispose of in the first quarter of next year.

Now coming back to our existing non-performing assets, we have made steady progress to impair those assets down now to a level that represents charges cumulatively of 46% of unpaid principal balance.

You might recall that when we talked about progress made in impairments on existing NPAs last quarter, we were at 36% cumulatively.

So we have added another 10% there and not too many quarters ago, we were in the range of 15% or 17%.

So we are trimming down any potential future exposure by charging these existing NPAs down; and of course, all of this is done using current appraisals that have had a tendency to trend more to liquidation appraisal amounts than was the case six or nine months ago.

Our problem asset disposition strategy has been very important to us in cleaning up the balance sheet.

Just to kind of go back over the earlier part of the year, in the first quarter we were not as successful for seasonal reasons and economic reasons selling a little over $100 million in assets.

In the second quarter, we ramped that up to $404 million.

And in this third quarter, we achieved sales of some $339 million in problem assets.

So that number would be right in line with the expectations that we had set for ourselves as we started the quarter.

Our past dues remained relatively low at 1.35%.

They were 1.2% at the end of the second quarter.

We had had a spike in that indicator at the end of the first quarter as I recall something over 2%.

So we're holding steady at an acceptable level with our past dues.

We track and monitor and report very closely our pre-tax, pre-credit cost income.

It came in at a slight increase at a level of $148 million or 2.1% of risk-weighted assets.

We feel like we're showing some good strength for future earnings potential with this particular measure.

We will have some pressure with the decline in balance sheet outstandings, but despite the shrinking balance sheet we were able to increase this and I was pleased with the result.

Core deposits continued a positive trend, 3.4% year-over-year growth.

In the linked quarter, our core deposits were relatively flat; but we did have good success in improving the mix of our deposits as we replaced higher priced time deposits with lower cost funding.

And some of this opportunity remains for the fourth quarter because late last year, the entire industry was faced with some pretty high CD rates.

These are now maturing and we're getting some relief.

Our non-interest bearing deposits grew at 16.1% on a linked quarter basis annualized.

The net interest margin was 3.22%, and that's down one basis point.

There is a factor to consider here as we are managing very carefully and conservatively our liquidity position.

We did have the proceeds of our capital raise had entered it; but just more importantly, we are guarding liquidity very carefully; and that does have a tendency to dilute the margin.

The drivers that we think will help us in the margin overcoming quarters are still in place; but this liquidity impact was the biggest factor in our not actually showing an increase in the margin.

The net interest margin, excluding the negative impact of non-performing assets, was 3.64%, which is up two basis points from the second quarter of '09.

Core expenses continued a good favorable trend for us.

Our headcount is now down 13% from its first quarter of '08 peak, down nearly a 1,000 in number.

Our fundamental G&A is down 5.1% compared to the third quarter of 2008; and on a sequential quarter basis, our G&A is down slightly.

The capital plan execution continued in the quarter.

As you know, we completed the $600 million public offering of 150 million shares of common stock.

We did launch our debt for equity exchange during the period it will soon be completed.

Tommy can talk more about those dates later.

And we are executing other balance sheet initiatives in the current quarter, the fourth quarter, as well as the work that was done in the third quarter to improve our capital ratios and give us good indicators of strength.

Speaking of our capital ratios, our Tier 1 common equity percentage at the end of the quarter was 7.24%.

We were in that particular measure at the end of the previous quarter at 6.42%.

So we had, despite the loss, a good healthy increase there.

Those include the thoughts and the high level points that I wanted to make to get the call started.

As Pat indicated, Tommy will come next followed by Kevin; and I'll come back with a few concluding thoughts before we begin the Q&A.

Tommy?

Richard, thank you very much.

I'm going to refer you to Slide 9 to begin to look at the financials.

And what you'll see there is a trend of quarterly financials that looks back one quarter and looks back a year ago also; and you'll see the reported results there of $423 million net loss, $1.27 per share.

You can see the trends there; and I guess the key driver line, the provision expense being under last quarter but still an elevated level; and obviously, that along with a limited tax benefit that Richard described are the two key drivers for the quarter.

I want to point out that the bulk of the third quarter results were built into our capital plan.

Not all of them, but the majority of the loss that occurred in the quarter was built into the plan along with the way the deferred tax asset is dealt with in the plan with the assumption that upon profitability you begin to enjoy the better side of that tax accounting.

And then any writedowns, or most of the writedowns that occurred that created any excess over our short-term third quarter plan, were largely attributable to losses that we believe would occur throughout the period of the capital plan.

So we think that for the most part that this loss is not incremental to the capital plan.

You'll hear from Kevin later.

There is one component that was at a higher level than we thought it would be in the quarter, the run rate on NPAs did decline; but not as much as we thought it would.

So what we've done with regard to freshening up the capital plan, we're going through our normal 2010 planning process; but--and we'll have a far more integrated approach to this a little bit later; but just based on what we saw in the third quarter, we took a look at the assumptions of the capital plan, and we ran through an exercise at a high level that really allowed us to reach the similar conclusion that we have put out before.

And that's that we have a significant capital cushion against our estimates of capital adequacy.

And basically, we did change some of the components of it.

The way we built the plan was off of run rates.

We--on the NPLs, we elevated that some.

We are seeing better realization rates than we anticipated in the capital plan on disposing of assets, and we bumped that up a little bit in the new model.

We did have a net increase in credit cost as a result of those two items.

We had a reduction of risk weighted assets that is obviously--frees capital and helps buffer any changes in the capital adequacy.

And as a result of the decline in risk weighted assets, we took down the pre-tax, pre-credit cost income a little bit as the balance sheet, we believe, will be somewhat smaller than is in the original capital plan.

We're really not at a point where we want to get into the particulars on the numbers.

We're still in the process, but we are comfortable with the conclusion that there remains a significant cushion against the capital adequacy that we had measured before.

I'm going to take you through some balance sheet highlights that begin on Slide 10.

Slide 10 is a picture of our history of our loan balances; and as you can see, we're trending downward, had been kind of moving a little bit sideways and saw a pretty good downdraft.

In the third quarter, we were at 27.5 billion one quarter ago; now we're at 26.3 billion and that's about a 1.250 billion reduction.

And that's really a part of this liquidity story and I'll get into that in a minute.

This loan reduction was not unanticipated, but it happened at a greater pace than we did expect; and it'ss part of the liquidity story and I'll share that with you as I talk about the margin.

The core deposit story is on Slide 11.

We feel good about our core deposit story.

The decline in loan balances has allowed us to be pretty smart and able to accomplish our objectives on core deposits a little bit of the funding pressure off as the loans have reduced some; and you can see that we, from a linked quarter basis, we kind of moved sideways in terms of total core deposits.

Year-over-year basis we're up 3.4%, $1 billion growth in the shared deposits during that time frame; BDA growth of 15.5% or $539 million; and on a linked quarter basis, DDA up 16.1%.

So really this--our focus this year has been on a number of things; but one key objective is to grow high quality or improve the mix, and grow the right categories of the core deposit book.

And you can see the reduction in the time deposits as we have been sort of orchestrating that with very careful pricing, and letting some of that roll off.

But the other side of it is, we've got the improvements in the categories that we're shooting for being the money-market and NOW accounts and the DDA accounts.

So we feel good about the direction and quarterly performance on core deposits.

Slide 12 shows a trend line on loans at the top of the page; and it sees the--it shows the acceleration of the decline that occurred in the third quarter.

And then it also illustrates the trend line on the core deposits; and we're very satisfied, and think that it's prudent that the loans funded by core deposits has moved up during this period from 78% to 85% since last year.

Going forward, we've got a lot of CDs that are rolling off.

We're going to be very thoughtful about keeping just the right amount of them.

We've got some single service CDs that we will not be aggressive on pricing; but we will continue to push on all of the transaction accounts, and believe we'll continue to have success in that area.

Slide 13 shows the net interest income and the margin with net interest income declining slightly in the third quarter as the margin reduced a little bit and the balance sheet reduced some.

This 3.22% reported margin was lower than we thought it was going to be.

It was a good bit lower than even right up until the end that we thought it was going to be, and we had a couple of things going on.

First of all, the interest charge-offs were a little bit higher than we assumed particularly as we had this--the non-performing loans coming on late in the quarter, but I want to give you a little more color on the liquidity side of it.

As Richard said, we think it's a good thing to have additional assets and liquidity, and we had set out to build that and were very successful in doing so.

We now have approximately $3 billion sitting at the Fed as opposed to a $1 billion a quarter ago just in round numbers.

We really intended for roughly half of that increase to occur.

The other half occurred from as we planted our feet on the liability side--on the asset side, the loan demand slowed down very much and the average loan balances actually created positive cash flow from a liquidity standpoint on the loan side, and we ended up more flush than we intended to be or plan to be from that standpoint.

And then in addition to that, the capital raise came in right at the--towards the end of the quarter and added almost $600 million to the mix.

So let's just say roughly half of that addition was from events occurring during the quarter; and in the case of capital, late in the quarter.

It takes a while to bleed that off.

Having lots of liquidity isn't the worst problem in the world, it's certainly got positives to it; but we would plan during the quarter to let some CDs roll off.

We'll be very careful about selectively looking at ways to employ some of that liquidity in higher yielding categories.

We would expect the somewhat elevated liquidity levels on average to remain as a good bit of that came in right at the end of the quarter.

So that particular pressure piece on the margin will remain largely through the fourth quarter.

The liquidity excess balances we described will lower by the end of the quarter; but on average we feel like it will still be a factor in the margin in the quarter and will continue to put some weight on the margin, and keep it at or slightly two or three basis points possibly under where it is now.

We do, as Richard said, see the forces that are behind the core margin continuing to work.

The good front line pricing on loans and deposits, and we believe that that energy will translate upticks in the margin as we get past the fourth quarter.

Slide 14 illustrates the trends and expenses in headcount.

Richard mentioned our expenses are continuing to reduce some of it as a result of project Optimist, some of it as a result of just managing the Company more tightly overall.

The headcount reduction is illustrated on the right-hand side of this slide, and you can see that we're down 13% from the peak head count of 7,331 back at the first quarter of '08.

We would expect the pressure to stay on the expenses, and expect some downward trends to continue there.

The pre-tax, pre-credit cost income is illustrated on Slide 15.

You can see that we recorded $148 million this quarter of 2.1% pre-tax, pre-credit cost against risk weighted assets.

And that trend has been moving up some.

The $148 million included some security gains, $14.7 million during the quarter.

We have done, as most of our peers in this disclosure, we've left items in there like securities gains.

We've left the good and the bad of unusual items in; unless it's items that are clearly, because of size or nature, need carving out and those were all illustrated on the bottom of this page.

Last quarter we had some MasterCard gain and venture capital gain, but we also had a $16 million FDIC insurance assessment that we left in.

So just want to give you fill disclosure on that.

But otherwise we would expect going forward the trend on this line to, I guess, the components of it would be the fee income, moving slightly in an upward fashion, the expenses moving down, and the net interest income moving down to sideways just a little bit and then with the possibility of that lifting a little further out.

So we feel good about the performance on pre-tax, pre-credit cost income.

I'm going to stop right there and turn it over to Kevin Howard, our Chief Credit Officer.

Thanks, Tommy.

If you will go to Slide 17, I'll cover the credit quality trends for the third quarter.

NPAs, as you can see, went up slightly by $29 million or 41 basis points.

Remember as Tommy mentioned, our loan balances declined and that is the denominator in that formula.

So that accounted for 30 of the 41 basis points in that ratio.

On our reserve, despite loan balances declining during the third quarter, our reserve balance had stayed about the same resulting in a reserve build of 16 basis points.

Our charge-offs increased $141 million up to 7.33% during the third quarter.

About 58% of this, $286 million went toward writing down our existing NPL balances; or said another way, cleaning up the balance sheet.

Let me break out a couple of the components of the charge off number: $119 million in impairment of new loans.

We do expect that would be less next quarter, we expect our less loans coming in in the next quarter; 135 million in fair value writedowns on existing loans.

That number was around in the mid 50s, I think, last quarter.

We think that's reflected in some of the appraisals that reflect more liquidation comps in there, and we're not arguing a lot with appraisal.

We think it's appropriate to mark the non-performing loans down.

We're now 46% marked against NPAs, as you'll see later in the slides.

At that level, our expectations are that with that mark, next quarter will not be that severe in the mark-to-market writedowns.

$32 million of the charge-offs were in writedowns on loans held for sale.

So that makes up the 58% I was speaking to went toward cleaning up or marking down the non-performing assets.

Also, $76 million in charge-offs were for dispositions.

Once again, considering where we are with our aggressive markdown this quarter against NPAs, we expect less of a disposition charge off in future quarters.

We are confident based on the progress we have made in addressing our NPAs in the third quarter, that the third quarter charge-offs will be a peak number.

Past dues stayed relatively low at 1.35%.

Slide 18 is our asset disposition--shows our third quarter asset dispositions.

We sold $339 million, which is on pace of our stated expectations to sell $600 million of troubled assets in the last two quarters of '09.

We got $0.46 on unpaid balances, I think we were $0.45 last quarter.

The mix was about 70% residential, about $237 million.

The mix was in the residential with 70% houses.

We got $0.57 on unpaid balances on the lots.

About 30% of the residential number were lots; and we got $0.36 on the unpaid balance.

Investment real estate $45 million, $0.40 unpaid on the land we sold; $22 million in land and it was $0.24 of the unpaid balance; and on C&I, we had some owner occupied that we sold that was $31 million and we got about $0.46 on the unpaid balance.

Geographically, the total $338 million about 40% of that came out of the Atlanta market.

Slide 19.

This was a very important slide to understand and it demonstrates what Richard was referring to in cleaning up our balance sheet.

When you include ORE writedowns and allowance, we have addressed our NPAs with approximately a 46% mark against unpaid balances.

We increased our cumulative writedowns on existing NPLs during the third quarter, as you can see from about 17% to 29%; and that's that $607 million number.

That brings, again, our total writedown of specific reserve to 42.2%.

And coupled with our ORE mark by 61% gets you to a total of 46% that is specifically reserved for or written down on our total NPAs.

Slide 20, this slide reconciles our NPA activity for the quarter; and as you can see, our total NPAs were up slightly.

Let me point out the additions line of $756 million, that's a key component obviously of this slide.

While we stated last quarter we expected our NPL additions to decline, and it did.

We were not expecting it to be this close.

We do, again, expect the incoming NPLs to decline in the fourth quarter based on our projections.

The next slide, Number 21, demonstrates the new NPL addition and which regions we believe will improve.

This is our run rate by geography on Slide 21.

Let me just point out Florida.

We showed Florida increasing during the third quarter.

We think we have gotten behind us almost all of our larger credits that we were concerned about there.

We're confident we will see some improvement there in the fourth quarter.

In Georgia, excluding Atlanta, we did have some increase in the run rate that surprised us somewhat.

These were mainly some mid-size land and residential credits out of parts of South Georgia and along the Georgia coastal area.

Our expectation here is that the fourth quarter will look somewhat like the third quarter as far as run rate, and we do expect to begin to see some improvement in the first quarter of 2010 in this region.

In Atlanta, we did see some improvement in our run rate there.

It's certainly still a high number and higher than we anticipated this quarter.

Our expectations are there with the total amount of performing residential C&D loans.

They are now around $600 million in Atlanta and despite the difficulties in the housing market and the environment there, we still believe we'll start to see some improvement in the run rate there in the fourth quarter.

South Carolina did show a decline again on new NPLs in the third quarter.

We expect about the same level in the fourth quarter.

Alabama and Tennessee should remain about where we were in the fourth quarter.

Slide 22, just a quick look of charge-offs by loan types.

This slide--you can see still the bulk of our charge-offs.

About 63% came out of the residential properties in land, somewhat like it looked last quarter.

Slide 23 is a look at our investment real estate.

As you can see it is still holding up very well.

Past dues are low and no increases in the NPL run rate this quarter.

Excluding one large credit, our total NPAs would be just a little over 2%, 2.3%.

The one area within this portfolio that has shown some deterioration as it has in the last couple quarters, is the commercial development portion.

It's not the largest part by any means.

It's about $700 million as you can see.

About half of the problem loans that we have had in losses have come out of the Atlanta commercial development portfolio.

Atlanta's remaining performing commercial development portfolio though is now less than $140 million.

So we expect to see some improvement there in the early part of next year.

I also want to add that in the third quarter, we did a review of all investment commercial real estates over a $1 million across the Company.

This review consisted of a little over 1,300 loans, equating to about 80% of the investment real estate commercial real estate portfolio.

This provided us opportunities to meet with our customers, obtain current financial information, and allow us to remedy some situations when possible.

In this deep dive of the investment commercial real estate done during the quarter, we did see some deterioration in loan to values and cash flows as expected; but overall, we were very pleased with the credit results and where we were in that portfolio.

Slide 24.

You've seen this slide before which demonstrates our declining exposure to residential C&D and the land acquisition portfolio.

The portfolios here, the residential development one to four family construction in land have made up over half of our total NPAs.

Atlanta comprises about 40% of the NPLs within those three portfolios.

Illustrated here, you can see these three categories, once 22% of the entire Synovus portfolio now a little bit below 12%, Atlanta's portion once 7% of the total loans in these categories are now a little less than 2%.

A quick look Slide 25 on C&I holding up pretty well.

Past dues are below 1% again and the NPL ratio is 2.1%, 2.13%.

Charge-offs did increase this quarter within C&I.

It was primarily isolated.

The increases were primarily isolated in the manufacturing and construction sectors.

Some of those construction losses were in some of the hotspots that we're in in real estate and some subcontractors and construction companies there.

This slide, as you can see, does demonstrate very good diversity in the C&I portfolio.

Finally the last slide, Slide 26.

This slide covers the consumer portfolio.

Just a quick look overall this portfolio is also continues to trend well.

We rescore this portfolio on a quarterly basis, and the average beacon scores have not declined over the past year.

Total past dues are down 10 basis points this quarter to 1.67.

Charge-offs were up slightly from last quarter.

Our net non-performing loan ratio for this whole portfolio declined this quarter from 162 in the second quarter to 150 in the third quarter.

That's all from the credit preview.

Richard?

Thank you, Kevin.

Just a few summary points and then we'll get into the Q&A.

Last quarter is going to be weak to some extent, again, as we have said all along.

But we certainly feel that we have an opportunity to be profitable at some stage in 2010.

We feel just as optimistic about that possibility as we did three months ago.

We will, as a reminder, begin to recover this DTA valuation allowance once we return to profitability.

We will continue to be proactive in recognizing our problem assets and in valuing them.

The asset disposition plan will continue to be aggressive in the fourth quarter.

We can talk about that more.

It might not reach the level that we reached in the third quarter, but the tactics will continue to be the same.

We are proud of maintaining a very good liquidity position and that will be a priority.

Our capital position is strong, as you know, we have cited the measures.

I will point out just one ongoing activity that Tommy was going to mention later and it has to do with the Visa stock.

We're working on a plan to sell that, expected to realize in the range of $52 million from that transaction.

Core deposit growth continues to be good.

It's something that we really focus on every day.

The incentives that we're paying in the banks today are basically tied to core deposit growth, nothing else.

The pre-tax, pre-credit cost income does show good potential, and we were pleased with the progress there.

The margin we've talked about, but it will normalize.

And we continue to see some good drivers toward that that exist in our fundamentals.

And we're confident about our future for 2010 and beyond.

We've got other attributes that you're aware of certainly the markets that we're in, this region of the country while understressed today; long term is going to serve us well and others well and we're proud to be a part of it.

So, having said that, I'd like to now open up the call for questions.

Thank you, ladies and gentlemen.

The floor is now open for your questions.

(Operator Instructions)

Our first question is coming from Kevin Fitzsimmons.

Please announce your affiliation and pose your question.

Sandler O'Neill.

Good afternoon, everyone.

Hi, Kevin.

Just want to start off asking about the deferred tax asset charge.

I know you all said earlier that the loss from the quarter was in your plan and came in line with your capital plan.

Was the DTA--was that part of the plan like when you were all raising capital, was it kind of known that you were going to have to take this?

Or was it just a possibility at that point?

And if you could help us along with the timing of--I know you took, you set up part of the allowance last quarter and now part here, was there a reason for splitting it versus doing it all at once?

And is there anything left of the deferred tax asset?

Thanks.

All right, Kevin, this is Tommy.

I'll take that one on.

The effective tax rate that was in the quarter, 6% was anticipated earlier to be higher and provide a greater buffer against the loss.

And I want to clarify what we said about the third quarter.

We did have a loss planned in the third quarter, and the actual loss was a part of the capital plan.

The loss was bigger than we anticipated; but the reason for the loss, some of the additional marks that occurred on the assets that cause us to exceed our own plan, were for the most part losses that were built into the capital plan in future periods before it's completion at the end of next year.

So to the degree that we're in a period where we still have some carry back into 2007, and the net operating loss carryback doesn't change; but if the estimated loss for the year does change, then it lowers the effective tax rate during this period.

The effective tax rate for the year should be about 14.5%; and assuming we hit our targeted income in the fourth quarter this year, that rate should be about 14.5%.

It gets real simple after 2009 when you're not in a transitional year with net operating loss to carry back to you; because if you get into a period where you have a loss, let's say the first quarter of next year, you have essentially a zero tax rate.

So it gets real simple.

It also gets simple as you begin to early stage--begin to get into your pattern of profitability; and you essentially, during the first period of profitability would also have pre-tax income and after-tax income being the same number until you establish a pattern and credible view of sustainable profitability and can release the whole thing.

So that's a long answer.

I hope, Kevin, that helps.

Thank you.

Our next question is coming from Nancy Bush.

Please announce your affiliation and pose your question.

NAB Research.

How are you guys?

Good, Nancy.

I guess my question would be on the liquidity position.

Everybody will register a little bit of disappointment with the margin trends this quarter, and I certainly I think understand the reason you wish to maintain the liquidity.

But if you could just state that or just expand on that I'd appreciate it.

Yes, Nancy, this is Tommy.

I'll take that on.

The liquidity position that we intended to build, which was largely just the result of being prudent in this environment.

And also we've got some significant customers like big large state deposits that flow in and flow out regularly.

And we like the idea of having some asset side liquidity to buffer those, in addition, to just general prudence.

And so those volatile deposits that go out and come in routinely are a good reason to have additional liquidity.

The second part of it was not planned.

It was something that occurred as the loan demand dropped off pretty precipitously; and then obviously; a very good problem to have was the additional liquidity created by the capital raise.

So those are the moving parts.

We don't think it needs to be at the level it's at.

We intend to reduce it, but we're going to reduce it very thoughtfully.

If you look back to other periods when liquidity has risen like that, go back to the TARP time last December.

What you'll see is a pretty big surge in asset side liquidity.

And then you bleed it out over a period of time, generally a quarter or so, to properly bleed it out.

So I was disappointed in the margin; but I'm not disappointed in the causes of it, the reason of it.

So we wished it had gone up, we're glad the forces that that are core and will be ongoing are still working in a positive way.

Thank you, our next--

Go ahead.

Thank you.

Our next question is coming from Adam Barkstrom.

Please announce your affiliation and pose your question.

Sterne Agee.

Hi, gentlemen, good afternoon.

Hi, Adam.

I want to follow-up on Kevin's question.

Back to the deferred tax asset.

I mean, do we, is there a clear answer that the remaining $330 million--is that going to remain in tact or could we--it seems to me that why not have written down the whole thing?

Adam, there's only $20 million of net deferred tax asset left after the valuation adjustment.

And the way the accounting rules work on this, this--in the year of transition that I described it's rather awkward because as long as you have some net operating loss carryback, and you have to consider that; and the idea is to try to spread the impact of not carrying the BTA beyond your net operating loss carryback.

The idea is to spread it into the annual effective tax rate and so you have to adjust it each period if you change your estimate of book loss.

So we think the fourth quarter will not have this level of volatility in it.

And then as I said before, it's going to get real simple in the first part of next year.

Just so I'm dead clear, what is the remaining deferred tax asset, the net?

When you take the net deferred tax asset, which is net of deferred tax liabilities, that's $351 million.

You apply $331 million valuation allowance to it and you get $20 million net asset that's left on the books.

Got you.

Thank you very much.

Thanks, Adam.

Thank you.

Our next question is coming from Christopher Marinac.

Please announce your affiliation and pose your question.

Thanks, FIG Partners in Atlanta.

Richard, Kevin mentioned before about some changes in a residential deterioration in Georgia outside of Atlanta.

Just was curious to what extent some of that was catching up things that you had not seen before or would this be sort of a new trend we should expect more of that in the fourth quarter or early next year?

Kevin?

Yes.

I think it was a little bit of catching up, and I think we're probably just evaluating that portfolio.

It looks like we're getting on the better side of that.

I think we'll probably have a little--about the same type of deterioration.

I'm expecting a little bit better but--this coming quarter; but we clearly see kind of an end to that and things improving in the residential book.

And I'm talking, mainly, I mentioned around the South Georgia--coastal Georgia area where we did have some exposure.

And it hung in there a little bit longer.

The market wasn't as bad as maybe a Florida market or Atlanta or coastal South Carolina.

So we're starting to see that a little bit late in the game, but it's not a real big book and again, we expect probably another quarter.

Kevin, is it possible that some of the South Georgia credit that you mentioned is really tied to loans that were made in Florida or am I wrong about that?

Some of it is in the middle Georgia, South Georgia and some of the loans were right around the border there.

So we did reach out and do some loans on the panhandle there, but there's not that much of that left.

It hadn't been identified and dealt with.

Kevin, thanks.

That's helpful.

Just one follow-up for Tommy on the deferred tax asset.

How many quarters of a pattern do you feel that you'll need before you can make a move to recoup some or all of what you take on the allowance?

Adam, when you return to profitability, you begin to enjoy the other side of this because you can have profits that--where there's no tax.

So you've begun essentially to eat away at the valuation.

It is not totally clear about the evidence that's required.

It's a combination of a pattern of profitability, the way you got there, and a plausible forecast to allow you to release it.

But it is clear that you will have a period of time, and I can't tell you the number of quarters that it would take where you would have pre-tax and after-tax profit being the same number; and enjoying the benefit of the other side of this.

Let's face it, there's not a rich pattern of this activity in the history.

It's a relatively new phenomena and we're just working through it.

I understand.

That's helpful.

Thank you for the color.

Thank you, Chris.

Thank you.

We have a follow-up question from Nancy Bush with NAB Research.

Please pose your question.

Yes, guys.

Another just add-on to that liquidity question, Tommy.

Do you think that the margin will start to--I mean if this liquidity bleeds out, do you think the margin will then start to improve; and would that be sort of an early 2010 event?

Nancy, that is what I think.

We, again, as the liquidity bleeds off some, another variable factor will be the credit costs that weigh on the margin.

But we think some relief beginning there can also be accretive to the margin; but the core forces behind the margin are still working, and we believe that provides some upside potential.

And let me just make sure, somebody said losses have peaked in the third quarter.

Was that a statement or did I mishear that?

Yes, Kevin commented that charge-offs have peaked.

Okay.

Thank you.

Our next question is coming from Bob Patten.

Please announce your affiliation and pose your question.

Thanks, Morgan Keegan.

Yes, my question is sort of around what Nancy asked.

I'm looking at the fact that you guys now have capital or you bolstered capital, you're going into the winter months when pricing and auction activity really drives up.

You're kind of setting the hatchet in front of yourselves to sell this stuff by the fourth or first quarter when the economics are going to be poor.

Now that you're in a position you can try to negotiate better transactions for better prices over the next couple quarters, what goes into that thought process?

I'm going to ask D.

Copeland to answer that, Bob.

One of the things that is out there is one of the reasons we said we would look at doing $600 million over two quarter period.

We did roughly 340 for the third quarter.

We also had a lot of extreme activity that is, and has carried over early in the fourth quarter that we are continuing to close on as we speak.

I would agree with you the last five to six weeks of the year are going to be very hard to close on and we have anticipated that on the front end.

The other part of that is at the end of the first quarter, you start to pick up some seasonality that we should be able to improve and move on that.

But we really haven't given guidance on what we're going to do from a sale standpoint on the first quarter.

So we have a bigger head start coming into the fourth quarter than we've had on both second and third quarters.

But wouldn't it make sense, because in the end you're just giving away shareholder equity.

Wouldn't you guys want to--now that you have the capital, rationalize that thought process of waiting until the market gets better a little?

Well, I will tell you, we work through every individual asset extremely hard.

And giving away shareholder equity maybe I'll say that's an opinion that you may want to go with; but what I'm going to say is that we're disposing of the assets that we need to manage what we need to from a balance sheet standpoint.

I think that it's important that we maintain the level that we are from a problem asset standpoint.

Is that from a regulator standpoint?

I think it's just prudent.

Okay.

Thank you.

Our next question is coming from Jennifer Demba.

Please announce your affiliation and pose your question.

SunTrust Robinson Humphrey.

Good afternoon.

Hi, Jennifer.

I was wondering if you could give us some more color on the commercial development weakness that you've seen?

And also if you have any details on the maturity schedule and the loan to values in your income producing CRE portfolio that would be very helpful.

Thank you.

I'll start with your last question on the maturity schedule is--this is Kevin again.

Our commercial real estate typically matures all the loans, not all of them, almost all of them three years or less.

So we get a chance, Jennifer, once a year at least to look at about 30% to 40% of that portfolio.

Get an opportunity to potentially right size a credit when we can, rework a credit.

So we're looking at those loans are almost all recourse and they're maturing on a regular basis.

So I'd say the book turns over, like I said, about a third of it every year.

So that's a positive thing and that's a positive characteristic of our portfolio.

The second part of, I think, your first question on commercial development, we have had, like I mentioned before, that book is a little less than $700 million.

It has come probably half of our non-performing loans and about half of our losses have come out of the Atlanta area.

Good news there is we only have about $130 million or $140 million left of that.

But a lot of that has come from the commercial development portfolio just where some land that was developed and the slowdown, and the lack of lending on any type of income producing properties has certainly hurt the commercial development part the most, the property in that portfolio that doesn't have the income stream tied to it.

So it has--we expect and we have built in more--to be more problems in that portfolio over the next quarter or two; but the good thing is it's not a large portfolio and we are dealing with it.

You asked that I think a third question as well.

On the LTVs I think was the third part.

On CRE portfolio.

Okay.

I don't have it by loan to value.

We're constantly updating, I think we may have that somewhere, Brett, but the loan to values I mean we probably are in the 80% range in that portfolio.

I'm in the range there.

I'm going to try to pull that and maybe circle back with you.

Brett just circled it.

We're in the 75% to 80% range on loan to value in that commercial real estate portfolio.

Thank you.

Our next question is coming from Gary Tenner.

Please announce your affiliation and pose your question.

Soleil Securities.

Good afternoon.

Hi, Gary.

Two quick questions.

First off wondering if you could update us with anything on the exchange offer as that proceeds; and then secondly, regarding I think, Kevin, you'd mentioned or Tommy first quarter actual expectations of asset disposition was in the $300 million range; and you had taken an additional 150 reserve for that this quarter.

Is that correct?

This is Richard.

I'm going to ask D.

to comment on that but the accounting, I think, was what he just repeated.

That's correct.

The only exchange--

Well let's while we're on this subject let's finish that.

I think what D is--

I think you're just wanting confirmation that's what we set aside and the valuation reserve that it would be.

That we would renew roughly $600 million with $300 million worth of valuation reserve, and both reserves and ORE, and that is the case.

So you basically rolled forward what you'd set out last quarter by one quarter?

Yes, that's exactly right.

That is correct.

The only change that would be different is the mix had a little bit of a shift in that, basically, we're going on past history as the split between ORE and NPAs, it would be so we were at two-thirds, one-third NPAs to ORE last quarter; and we are at 60% and 40% for the two forward quarters.

And that 150 kind of rebuild of that asset disposition and reserve, so to speak, is included in that $500 million provision for the quarter?

It's not showing up anywhere else?

Correct.

Okay.

Now, Tommy, on the debt swap.

All right, Gary on the common stock for subdebt swap that we announced back in early September, we're approaching the pricing period tomorrow, I think that closes out on the 29th of October.

And we've had indications of interest that would resemble the targeted amount that we had suggested earlier.

Obviously those decisions will be in the hand of the bondholders between now and the finish line, and they can continue to opt in or out; but we're looking forward to seeing some capital add from this strategy.

Okay, but at this point it's tracking along with what you thought when you announced it?

That's correct.

Thank you very much.

Thank you, Gary.

Thank you.

Our next question is coming from Jason Goldberg.

Please announce your affiliation and pose your question.

Barclays Capital.

Can you just maybe talk to the MOU that you've received from the Atlanta Fed; and I guess, move to the series as well.

And is that influencing you in terms of getting the balance sheet more liquid, selling down loans, keeping more Fed funds, etc.; and then beyond that, what are the requirements under those agreements?

Okay, we're really not comfortable saying much about that.

I'm going to ask our Chief Risk Officer to say what he can.

This is confidential, but obviously, was disclosed as we were working through the capital raise.

I think what I can say is what we said in the capital raise, that the document is one of just a monitoring document where we report on a quarterly basis activities that occurred in the Company and that is really about all I think that I need to say.

And I don't mind adding that the liquidity activities are what we think is prudent to do; and also as I mentioned before, part of the liquidity add was something that added on in a bigger way than we anticipated.

In other words, it wasn't part of our strategy to add that amount of liquidity; but certainly through the declining loan balances and the capital add that's where the rest of it came from.

Thank you.

Our next question is coming from Paul Miller.

Please announce your affiliation and pose your question.

Yes, FBR Capital Markets.

Just some clarification on Slide 20, which goes through your beginning NPAs to the ending NPAs.

Is the payment and proceeds in NPA sales the 175, is that related to Slide 18 when you talk about your NPA sales; and you have a total sales of 339?

So is that 339, is that a par value or is that the proceeds, or is the proceeds the 175?

The 339 is the par and 175 is the proceeds.

The 175 is the proceeds.

Okay, and then REA losses, right?

And they're just losses that are coming from stuff that was in, that moved over the REA that you eventually sold?

That's correct.

And the other question is that you said that you marked them down.

I don't know the exact timeline but like 15% in first quarter or second quarter then by 25% and now you're marking it down close to 46%.

Most banks I've talked to have their NPAs marked down roughly anywhere from 35% to 25%; and I don't want you to make any comments about other balance sheets because I know that can get hairy; but do you think there's still an unrealistic assumption out there on where these non-performing assets should be trading?

It sounds like you've gotten ahead of it a little bit?

Yes.

I'd be hesitant to speculate there.

I don't really know.

We do have a higher, actually lower threshold for impairing our non-performing assets.

I know some banks have a higher threshold.

Anything that's a million dollars or more, we impair.

I think there are others that might use a higher number, which could affect the impairment process and the cumulative writedowns; but it would be hard for us to speculate on other competition.

I might comment, this is Kevin, on one thing about the writedowns.

These appraisals that are coming in are reflecting, I think I mentioned this already, but reflecting these liquidation values in there.

And we're, I'll tell you this, we're not in the business of battling appraisers; and we are accepting that.

If those comps are in there, usually there's a mixture.

You could really make an argument and fight through that and fight and stick those out.

You're looking for fair value.

We're kind of in the middle of fair value and liquidation these days and who knows who's right; but we're accepting those type of appraisals and I think that's lead to probably a little bit more of harsher writedown in some of these assets.

But that all is in line with Richard's mission of cleaning up this balance sheet and returning to profitability.

Now, you said that you charged off I think in the quarter correct me if I'm wrong guys this $458 million.

What was--and then I guess some of that is the new stuff moving in that you're setting reserve against.

But what was the difference between that and the stuff already in NPAs that you wrote down from roughly I guess 65% to 55%?

I know I got those numbers not correctly right.

Like what was that catch up charge off?

Does that make sense?

Was it a little over 100 million?

The new stuff that came in was roughly about 350 million.

That's it.

Hold on a minute.

I think I mentioned--let me go back to the beginning slide of our charge off--$280 million of that number, which is 58% of the charge-offs went toward marking down our non-performing loans that are on the books now.

And that's three different ways we did the loans that came in, those impairments plus the loans that were on the books at the end of second quarter, still on the books now.

That was 135 million.

That number was like 40 and 50 the last two quarters and then there was another $32 million of loans held for sale.

We wrote $32 million on loans--down on loans that were held for sale.

That's the 280 that is reflected on the book right now.

And I mentioned, I think, the other $77 million was for dispositions and the other is in some smaller categories.

When you say that your charge-offs have peaked, I'm assuming that this is because you wrote down the books down to roughly 55% of the dollar there was that catch up or whatever of existing NPAs to be written down that probably doesn't happen again going forward.

That's the confidence that I've got right there.

I feel good about that--about that number.

Well, thank you very much, gentlemen.

Thank you.

If I might interject, this is Pat Reynolds.

The hour is getting late if we would--or could, let's limit our questions to one question and--as we close this out.

Thank you.

Thank you.

We have one last question coming from Todd Hagerman.

Please announce your affiliation and pose your question.

Good evening, guys.

Collins Stuart.

Just a quick follow-up, Tommy on the liquidity issue.

I don't know if I understood you correctly; but when you talked about the fourth quarter liquidity, was there any particular event, particularly as it relates to the $3 billion in cash that you have pledged at the Fed, was there anything that you're specifically looking to either to deploy those funds in the fourth quarter?

I'm just curious in terms of the timing the fourth quarter; and why it's going to be resolved if there's something there with municipal deposit that's leaving the institution or something else that we should be aware of?

We'll reduce the level of brokerage CDs some as they roll off.

We'll reduce the level of market CDs, as I mentioned before, that will let some of the single service CDs roll off.

We'll probably reduce some of the TAFT funding that's out there and that type of thing.

Okay, but it's not necessarily tied to an unusual liquidity event that's currently being contemplated?

No.

That's correct.

Okay, thank you.

Thank you, Todd.

There appear to be no further questions in queue.

Well I want to thank everyone for your interest in Synovus and continuing to follow us.

We're progressing through this challenging period.

I've been out into a number of our banks here in recent weeks and the level of engagement is impressive.

We've got a great team.

I have a lot of confidence that as we get through the next couple of quarters we'll have a lot better material to work with on these calls.

So stay tuned, stay in touch, call us with any follow-up questions.

Thank you.

Thank you.

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

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

Thank you for your participation.